Trinity's core net profit to climb 6.7% to HKD547m

But sluggish start in 2013 might shadow positive growth forecast.

According to Maybank Kim Eng, it projects a 6.7% YoY increase in Trinity’s core net profit to HKD547m, as it experiences operating deleveraging amid a weak SSSG environment, on top of a moderate promotion-led gross margin contraction.  

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Nonetheless, we anticipate more disciplined inventory turnover days in 2H12 compared with 1H12, given its strong retail execution capability. More importantly, we view the risk of inventory obsolescence to be minimal, as its stocks mostly comprise items from the last two seasons.

Slow start to FY13. Our recent checks with department store operators and apparel retailers point to rather sluggish festival and YTD sales, particularly of high ticket price items.

Inventory days of apparel retailers are still high though normalising gradually. We lower our FY12 SSSG assumptions in China/HK from 5%/12% to 4%/9%.

Overall, we expect the growth momentum to accelerate in 2H13 with a more favourable comparison base in addition to its marketing efforts.

Solid fundamentals warrant premium valuations. Trinity is now trading at approximately 40% discount to its historical average forward PER, which, in our view, more than reflects the slowing earnings growth momentum.

Our latest forecasts suggest an EPS CAGR of 10.2% over FY12-14F (ex- the Salvatore Ferragamo JV). We believe that its portfolio of reputable heritage brands, extensive sales network of self-operated stores and sound management track record means Trinity warrants a valuation premium over its domestic apparel peers.