Saturday, July 14, 2012

How is Padini faring?

Padini is one company that has done extremely well over the last 5 years. Its share price has also done very well climbing more than 100% over the last 1 year. Is it justified? It is now worth more than RM1.3 billion, not bad for an apparel and shoes company which relies on 90% of its revenue from Malaysia. Can this sustain?

Firstly, let's look at what does it do so that we would like to know what kind of metrics we would concentrate on. Padini is an apparel company with brands such as Padini (men and women), Vincci (women's shoes), Seed, Miki (children's apparel), P&Co and several other smaller brands. In terms of operations, it operates its own outlet namely Padini Concept Store and Brands Outlet. Besides that, it sells its merchandise through supermarket outlet as well throughout Malaysia. It has smaller operations overseas which only contributes 10% of revenue to the group.

If you ask me, in terms of the branding of apparels and shoes, Padini's positioning is towards lower to mid level brand targeting younger generations. In terms of competition, obviously it is a very competitive space, but to me as long as company has proven to do well, competition is not a major factor.

Anyway for an apparel company like Padini what do we want to look at?
  • cashflow;
  • receivables which is related to cashflow as well;
  • inventories;
  • profitability of course which includes return on equity;
  • gross and net margins;
  • revenue strength.

Important financials for period between 2008 to 3rd quarter of 2012
Looking at above, hence what do you see?
  • Nice trend in terms of Revenue and Profit. In fact, it shows a good consistent trend in this area;
  • Margin is also consistent with gross margin around 50% while net margin is between 10% to 14% with consistent improvement;
  • Return on Equity is consistent with slight growth from 24.6% to 26.8%. Seriously, you can't go much farther from there;
  • receivables - It in fact manages to keep its receivables at around RM30 million to RM37 million (during the period in review) despite the growth in revenue from RM383 million in 2008 to more than RM700 million expected for 2012. Why? I would suspect that sales from its own outlet has grown so much more than sales though the retailers such as Isetan, Parkson, AEON etc. This trend is good especially when comes to dependency. It shows that Padini is able to stand on its own selling from its own store i.e. Padini Concept Store and Brands Outlet. Look below for its total growth in floor space which shows that the growth in its own retail space has grown substantially compared to stand-alone store;
  • One concern is the inventory level. It does seem the company has stocked up for further sales. Well, of course its revenue has increased, hence ideally inventory should have increased as well. I however would have expected the company to be able to manage the inventory much better due to the growth in sales;
  • due to the expansion and increase in inventory level, free cash flow is not growing as fast as the Net Profit. This however is expected from a company that continues to expand its retail space. What is important though is that it is able to generate enough cashflow on its own to pay dividend that it wants to pay as well as grow. As long as its free cash flow is positive and enough to pay the dividend, the company should be fine.

This company it seems has been able to stand on its own despite the tough competition in the space it is competing in. Who says Malaysian company is not able to compete despite we see overseas brand coming into the local market?

Despite some concerns over macroeconomy of the country due to spill over effect from Europe and even the slowing down of China, I would think Padini is a company which will be able to compete on its own ground. I am impressed actually.

What about the pricing? I am expecting the company to be trading at around 12x to 13x PE based on its current price of RM1.95. Not too bad still (despite the growth in price in the last 12 months). But not that cheap either.


Sunny said...

My sifu once recommended this stock to me when it was at around RM 1.20, twice. I wasn't interested because I do not know much about clothing.

When I shop, I spend most of the time studying potatoes chips, crackers, and coffee (only Oldtown and Super), dairy product, and soft drinks. I study the relevant manufacturers (public listed companies) as well. If I were to start this earlier, I would not have missed Dutch Lady. I can name all the potato crisp / chips product with my eyes closed, and tell you which potatoes crisp / chip sells better and who is supposed to have the biggest market share, which one is the emerging star, which one is struggling in their business, and which ones export their product to overseas. And whenever there is anybody asking for opinion which one to choose and buy, I will always advise them, "Choose the one which is nice, don't buy cheap product, you'll regret for whatever price paid for lousy potato crisps."

I heard of Padini, but I don't know the brands they are selling. I liked only FMCG (fast moving consumer goods) because I thought one can stop buying clothes, but not so easy to stop eating and drinking. Once upon a time there was a potato crisp advertisement saying "once you pop, you can't stop", I still remember this.

Now I realize I should shop more in the garment segment, know more, and dress myself up in a better form. I seldom shop for clothes and shoes, because I thought that was wasting time and money. Well, I should have bought the shirts and Padini's share at the same time!

jack-max said...

The was not much competitive advantage for Padini. Padini cloth is not very good. Since Padini inventory is full, which mean more earning and less spending. This stock still good buy. Sifu geng!

felicity said...

Hi Jack

Not too sure about the inventory full thing as too much of an inventory is bad. I am not too sure for their reason for higher inventory. Perhaps more stores in place as they seem to expand in a hurry as well.
Your reasoning for the sale of current inventory will improve profit is not that correct.
However the thinking of the apparel is not too different from the rest is similar to my opinion.

Unknown said...

Is it bonia comparable to padini? Thx.

felicity said...

Quite possible but Bonia has bigger presence overseas. Bonia probably has lesser revenue than Padini. Also Padini is much more successful through their own chain of outlet as compared to Bonia. Padini's branding is also more concentrated.

khengsiong said...

I got Padini, bought it at RM1.1x. But I am concerned with the competition, particularly from Uniqlo. My feeling is that it needs to consolidate its brands.

Unknown said...

Great to hear that Kheng Siong. Anyway competition is everywhere starting from the day Padini goes into retailing don't you think?