Investment Highlights

• We lift our call on Padini to BUY from HOLD with a higher fair value of RM4.67/share (from RM3.70/share previously), based on an unchanged FY23F PE of 16x – at parity to its 10- year average. This reflects an unchanged neutral ESG rating of 3 stars.

• We raise our FY23F-FY24F earnings by 27% and FY25F by 21% to account for higher store count and sales assumptions.

• Padini’s 1HFY23 earnings beat expectations, accounting for 80% of our FY23F net profit and 74% of the consensus. In comparison, 1HFY18-1HFY19 accounted for 44%-46% of prepandemic FY18-FY19 earnings.

• YoY, 1HFY23 earnings of RM122mil surged 2.8x as its core apparels and footwear segment accelerated by 73% to RM893mil. The strong result was fueled by the reopening of economic activities in which all outlets were operating at full capacity vs. a year prior. Also, its management service segment posted higher revenue of RM82mil (+40% YoY).

• Likewise, 2QFY23 earnings expanded 22% YoY as revenue rose 19% YoY on gradual recovery progress from the pandemic.

• QoQ, 1HFY23 bottomline increased by 52% as revenue jumped 34% on the back of Christmas and year-end holiday sales.

• The group proposed a third interim dividend of 2.5 sen, bringing total declared dividend to 7.5 sen per share. This remains in line with our FY23F DPS of 12 sen per share.

• 2Q is a seasonally stronger quarter for the group due to the holiday season. Nevertheless, we expect the momentum to continue into sequential earnings, mainly bolstered by festivities such as Chinese New Year and improving consumer sentiment on easing inflationary pressures. Notably, inflation rate has again come down by 0.1%-point MoM in January 2023 to 3.7%. We also reckon a strong 4Q performance, capitalising on the upcoming Raya sales.

• On a side note, Padini is one of the beneficiaries of China’s reopening, in which we expect to see more footfalls from returning Chinese tourists.

• The group currently trades at FY23F PE of 12.3x, lower than its 10-year average of 16x while offering a decent yield of 3.7%.

Source: AmInvest Research - 27 Feb 2023