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Q-Tip #1: Padini (7052.KL)
Omicron has a Black Friday Sale... waiting in Malaysia for you!
Welcome to the first entry of our new Quick Tips (Q-Tips) series!
In contrast to my usual deep-dive reports - which tend to range between 5,000 - 10,000 words long - Quick Tips are intended as short write-ups about something that just happened to cross my desk, but was interesting enough to pass my cursory filters.
Rather than do an actual deep-dive which aims to provide a comprehensive overview of the stock, Q-Tips are simply meant to be short bursts of possible good ideas that are aimed at putting the stock on your radar - so that you can filter out the noise and start at the signals with actual potential. Just think of Q-Tips as a screener, but with an actual human being curating the results. Since I can pump out a Q-Tip much faster than perform a full deep-dive, I can bring many more such opportunities to your attention.
To be clear, Q-Tips are far from a finished product. They are simply meant to be possible good ideas, and the intention is simply to bring them to your attention - so that you can go on to do your own research into the stock. It would be highly inadvisable to simply take any Q-Tip idea at face value without doing any further research - for the simple reason that I haven’t done that requisite amount of research either. Please don’t blame me if a Q-Tip blows up - these are basically water cooler gossip.
Okay, now that we’ve gotten all the necessary disclaimers out of the way, let’s get into our very first Q-Tip.
Company’s historical financials on TIKR (free sign-up required)
With the appearance of the Omicron variant of the covid virus in South Africa, many “recovery stocks” in the Retail and Travel sectors saw their share prices hit hard on Friday - under the expectation that the global economy might have to undergo lockdowns again. Padini - a retail chain in Malaysia which mainly sells footwear and apparel - actually managed to up the stakes, when after markets closed on Friday it reported a -73.8% YoY drop in quarterly revenue for its 1Q22 quarterly results (June-Sept 2021).
Padini Holdings Berhad (7052.KL) is one of the more recognizable mid-tier apparel brands in Malaysia. The brand is pretty much a slightly budget version of a typical fast fashion clothing retailer like Uniqlo, with slightly lower prices. Their staple brands include:
I’ll be honest, I don’t shop at their stores a lot; so I don’t really know the exact breakdown between their footwear and apparel wares on display. But this screenshot of their segment results below from their latest annual report sort of gives you an idea of what to expect from the sales trends:
They have some overseas operations too, but those are kind of negligible, and I won’t go over them in detail here in the interest of time.
If you’d like to visualize Padini’s business better, just search for “Padini store” on Google Images and you’ll pretty much have seen everything you need to know as a potential customer:
Anyway, there’s not much unique about their business. It’s basically just your average retail store selling mid-tier branded apparel and footwear. Just imagine a budget Marks & Spencer or something.
Latest 1Q22 Quarterly Results
As you might imagine, the (hanging, drawing and) quartering of their YoY revenue sent tongues wagging in the local investment community. Padini’s management gave the government-mandated lockdowns which were implemented during the pandemic as the main reason for their underperformance - but since there were also lockdowns during their prior corresponding quarter of 1Q21 (June-Sept 2020), there was a lot of pearl-clutching going on in the local investment community:
However, notice what they say here in their Performance Review of their 1Q22 results (Note 13): the majority of their outlets were temporarily closed as a result of these lockdowns, which contributed to “no revenue (being) generated from these outlets during the (lockdown) period” (1.5 months out of 3 months).
Purely out of curiosity, I went back to the same section of their 1Q21 results to see whether anything similarly drastic happened in the prior corresponding quarter of 1Q21:
Nope, nada. It was all good last summer. No bad governments instituting lockdowns on us which forced us to close our stores and earn zero revenue for half the quarter.
Since they practically had zero sales during those affected 1.5 months of that quarter - and probably also suffered slow sales during the remaining 1.5 months of 1Q22 - it’s pretty understandable why they suffered a -73% YoY drop in quarterly revenue.
For context, rentals and staff costs in a retail chain store business tend to be relatively fixed compared to sales. The below screenshots show that Padini’s operating costs were relatively fixed compared to revenues in both 1Q21 and 1Q22:
So you would naturally also expect them to be deeply cash flow negative for the quarter, for the aforementioned reason. Well, apparently not so:
Hmm… so they missed half of 1Q22’s worth of revenue, and still managed to be cash flow positive - in an industry infamous for single-digit net margins? Interesting…
This piqued my curiosity enough to take a peek at their cash balance:
So this retail business is sitting on more than 1/4 of its market capitalization in cash (517/1842 = 28%)… and had positive operating cash flows, in a quarter where it missed half its revenues?
Now before any of you think that I’m trying to push some sort of net-net play with Padini, let me assure you that it’s nothing like that. But still, I think we can all agree that despite the pandemic, this company isn’t going to go bankrupt anytime soon.
Given that Padini’s pre-covid normalized annual Net Profit is approximately in the region of RM 125 mil, the implied normalized PE ratio is currently only about 15x at its current market cap of RM 1.85 bil.
Which is pretty interesting, because keep in mind what I said earlier - Padini is actually a pretty well-known retail brand in Malaysia. I wouldn’t say that their growth propects are amazing, but there’s still plenty of room to give credit to the non-negligible strength of their brand - like I mentioned earlier, Padini is pretty comparable to a budget version of a fast fashion clothing retailer like Uniqlo in these waters, with slightly lower prices. And if you understand the retail business, everything in that sector boils down to Branding - as I discussed in my earlier article about Innature:
Given Padini’s ability to tank half a quarter’s worth of missed sales without experiencing negative operating cash flow, I certainly wouldn’t be valuing it at 15x PE normalized earnings - which is pretty much the kind of fair value you’d assign to a no-name retailer with a similar normalized pre-covid earnings growth of around 10%. I’d imagine that if the latter missed half an entire quarter’s worth of sales, its operating cash flow would look like it was hit by a truck.
Anyway, like I said, Q-Tips like these aren’t meant to be conclusive - but the above results have certainly got me intrigued enough to want to find out how they managed to deliver positive OCF, even after missing half a quarter’s worth of sales. This is especially so when you consider how this local news article claims that Padini is one of the “recovery stock laggards” still demonstrating headline undervaluation relative to their historical average PE ratios:
With the one-two punch of depressive sentiment coming from both the 1) Omicron variant and 2) the company’s -73% YoY drop in revenue, I’m expecting Padini’s share price to take a beating tomorrow (Monday morning). If the share price drops enough, this might even become potentially interesting enough to warrant a deeper look.
Anyway, that’s it for this episode’s Q-Tip. Hope you enjoyed it, and please subscribe below for many more to come!
Company’s historical financials on TIKR (free sign-up required)
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Check out the rest of this blog - yesterday, I just published a 10,000 word equity research report of The Security I Like Best, which you can read by clicking below: