Investment Highlights

• We maintain our HOLD call on Padini Holdings (Padini) with a higher fair value (FV) of RM3.70/share (from RM3.45/share) due to revised forecasts. Our FV is derived from an unchanged FY23F target PE of 16x, pegged to +0.5SD to its 5-year mean. We make no ESG-related adjustment for our unchanged rating of 3 stars.

• Padini’s FY22 earnings of RM154mil (+1.9x YoY) exceeded expectations, recording 7% above our earlier FY22F earnings and 33% of street’s. The positive variance was mainly attributed to stronger-than-expected sales during the Hari Raya festivity.

• The group’s 4QFY22 net profit grew 1.4x QoQ and 6.4x YoY to RM78mil (51% of full-year profit) on the back of robust revenue of RM481mil (+46% QoQ, +1.3x YoY), 36% of FY22. For comparison, Padini’s 4Q pre-pandemic net profit ranged between RM40mil and RM57mil or 27-34% of fullyear revenue in FY17–19.

• Following the stronger-than-expected recovery, we are revising our FY23–24F sales assumption upwards by 2%. This raises FY23–24F net profit by 8%.

• Padini also managed to largely sustain its gross profit margin at 40% in 4QFY22 (+0.3% point QoQ) as price revisions and upselling activities offset the inflationary pressure on raw material prices.

• Following the positive earnings surprise, the group declared a higher-than-expected interim dividend of 5 sen/share, bringing its cumulative FY22 dividend to 10 sen/share vs. our previous forecast of 7.5 sen /share.

• From a valuation perspective, we believe the share price is fairly valued at the current level, trading at FY23F PE of 14.8x, slightly above its 4-year average of 14.5x (Exhibit 2).

• While the current demand for Padini’s offerings remains healthy, riding on the feel-good factor of broader economic reopening, we believe the fast fashion subsector is relatively more susceptible to spending cuts should inflation continue to erode consumers’ purchasing power. Other key risks are labour shortages and supply chain disruptions.

Source: AmInvest Research - 29 Aug 2022