Padini Holdings Bhd

Zara, Uniqlo, H&M, Gap, Giordano, Bossini, Padini… Of all these fashion apparel companies, which one would you invest in one year ago? People outside Asia may not have heard of the last three. People outside Malaysia may not have heard of the last one, Padini. But, it’s the last one that performed the best in the past year.

Padini sells menswear, womenswear, ladies’ shoes, kids’ wear and other accessories, mainly in Malaysia. The price chart below compares the price performance of Padini with Inditex (parent company of Zara), Uniqlo, H&M and Gap in the past one year. Padini is the blue line with 95% return. I didn’t invest in Padini one year ago, but I did two years ago.

Padini - Price Chat Compare.PNG

I invested in Padini in early February 2014 at RM 1.62 and sold out at 1.95 March, getting 20% return in one month. 

The reason I bought was

  1. the price dipped from 1.80 to 1.60 in late January 2014.
  2. the revenue and profit for the last quarter was up 10% or more against the corresponding quarter a year ago.
  3. Padini opened more outlets in the past few months, which should generate even higher revenue and profit.

I thought Padini was fairly priced at 1.80, and the dip to 1.60 provided 10% margin of safety. The margin was not much, but, the stronger revenue and profit in next quarter should lift up the share price to its fair value or even higher. When the quarterly result was released in late February, the share price indeed rose back to its previous level before the dip. So, I had ~10% return. Because the result was higher than market expectation, the share price continued to rise. I sold it at 1.95, and after that, it rose to above 2.0.

My reasons for selling were

  1. My initial plan to buy was to take advantage of the 10% price dip, which, I believe, should be reversed by a strong quarterly result.
  2. Padini performed outstandingly in the past 10 years with strong earnings growth and high ROIC. It also had net cash. If my point 1 above proved to be wrong, I’m still happy to hold Padini for short term, waiting patiently for the price dip to be reversed.
  3. With Uniqlo and H&M penetrating Malaysia market, competition will surely get tougher. ROIC is likely to fall in long term.
  4. When the share price rose to 1.95, I thought it’s slightly above my fair value estimate. Afterall, I was happy with 20% return in one month.

With all these reasons, I sold out. The decision proved to be right as Padini’s share price fell in second half of 2014 and reached the low of 1.30 in mid 2015. I considered that a bit of luck.

I didn’t follow the story after I sold it. As it turns out, if I didn’t sell it, I would have gotten additional 36% return (before dividends) by now. However, Malaysia Ringgit fell by 15% against SGD since March 2014 until now. So, the net return would be much less.

Padini operates several brands and about half of stores are consignment counters. Here’s the breakdown.

Padini - Outlets count.PNG

Padini - Outlets count Overseas.PNG

Source: Padini’s Annual Report 2015

This is the breakdown of revenue and profit by brands:

Padini - Financials by brands 2.PNG

Source: Padini’s Annual Report 2015

Note: Yee Fong Hung refers to Brands outlets with multi stores inside.

Look at its financials over the past 10 years. Both revenue and net profit quadrupled. Operating profit fluctuates in the range 11.5% to 18.5% and ROE in the range 20% to 30%. This outstanding performance is reflected in its share price, which rose by more than 1200%.

Padini - Financials 10Y - 2015.PNG

Padini - Profitability 10Y - 2015.PNG

Padini - Share price - 2016-07-31.PNG

For its FY16 (ending June), its first 9 months revenue grew by 26% while net profit grew by 62%. That’s why the share price rose by nearly 100% in the past one year.

Padini is doing this in a very tough apparel retail market in Malaysia and in the world, where e-commerce is attacking the traditional brick-and-mortar business everywhere and competes with price war, and many apparel companies worldwide experienced a substantial drop in earnings. Padini’s management deserves a thumbs up for their performance.

However, investing is forward-looking, not backward looking, and a good company has to be bought at a reasonable price to be considered a good investment.

At current price of 2.65, I think Padini is fairly priced to slightly over-priced. Therefore, I will not buy.

Its recent performance of 62% growth in earnings is not likely to be repeated in the following year. Part of the reasons why earnings grew at such a high rate was because FY15 experienced a margin decline, which was reversed in FY16. It also closed many outlets in FY15.

Being a Malaysia fashion brand, it has a disadvantage when competing against those global brands, such as H&M and Uniqlo, who are also selling in similar price range to or slightly higher than Padini’s. These global brands have huge resources to expand in Malaysia, and some locals will see these global brands as superior to their local brands.

What lesson do we learn from Padini?

  1. It has a good management who are running the Company with superior performance, in terms of both growth and ROIC. These are the two main drivers of value creation.
  2. Pay attention to whether they are opening new outlets and make sure SSSG for existing outlets are no a drag. With the Company’s high ROIC, new stores opening are likely to create value.
  3. We have missed this rally. It’s ok. We’ll wait for the next one if opportunity arises again.

Padini will be reporting its FY16 results in next few weeks. Looking at the price chart, it has certainly gained a momentum, which may continue to trend upward. So, I won’t be surpised if it rises to 3.0. But, I use value to guide my activity and will not jump on the bandwagon.

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