Investment Highlights

• We maintain our HOLD call on Padini Holdings (Padini) with a higher fair value (FV) of RM3.45/share (from RM3.15/share). Our FV is derived from an unchanged 16x target PE on revised FY23F EPS, pegged to a 5-year mean. We make no ESG-related adjustment for our 3-star rating.

• Padini’s 9MFY22 earnings of RM77mil (+61% YoY) exceeded expectations, accounting for 83% of our previous FY22F net profit and 82% of street’s.

• The group managed to improve its gross profit margin, reverting to the pre-pandemic level of 39% in 3QFY22 (prepandemic range: 39–41%), despite the inflationary pressure on raw materials prices.

• Padini’s 3QFY22 revenue held up at a decent level of RM329mil (-23% QoQ, +25% YoY) as the pent-up demand effect from the reopening of the economy subsided. The previous 2QFY22 sales also were boosted by seasonal festivity sales i.e. Chinese New Year and Christmas.

• Bucking the industry’s trend, the group’s gross margin improved 2.1% points QoQ and 2.7% points YoY in 3QFY22. We believe this resulted from price revisions and upselling efforts done by Padini to offset the impact of rising input costs which started in December.

• Exceeding our expectation, a second interim dividend of 2.5 sen/share was declared, bringing its cumulative 9MFY22 dividend to 5 sen/share (56% payout ratio).

• Given the robust demand, we believe Padini will be able to pass the increase in cost to end consumers and maintain its margin despite the inflationary environment. Therefore, we increase our earnings forecasts by 30% for FY22F and 9% for FY23F based on more optimistic margin assumptions.

• The company will continue to benefit from the economic recovery as consumers return. 4QFY22 sales are likely to be sequentially stronger as we expect Hari Raya promotions would have driven sales.

• We are projecting a robust 18% earnings growth in FY23F. However, valuation-wise, we believe the share price is fairly valued at the current level, trading at 15x PE of FY23F EPS, near its historical average of 16x PER.

Source: AmInvest Research - 30 May 2022