Investment Highlights

• We maintain BUY call on Padini with a higher fair value of RM5.70/share (from RM4.67/share previously), on higher earnings forecasts and a rolled-forward FY24F PE of 16x – at parity to its 10-year average. This reflects an unchanged neutral ESG rating of 3 stars.

• We raise FY23F – FY25F earnings by 15%–18% to account for higher sales assumptions as Padini’s 9MFY23 earnings beat our expectations, accounting for 83% of our previous full-year forecast and 80% of the consensus. In comparison, 9MFY19 accounted for 71%-74% of pre-pandemic FY19 earnings.

• Our FY23F store count, however, remains at 141 vs. 133 in FY22. This is in line with the group’s plan to open less than 10 stores in Malaysia throughout the year. Also, since management plans to focus on offering quality products instead of aggressive new stores expansion, we keep our store count assumption of 141 for FY24F – FY25F unchanged at the moment.

• YoY, 9MFY23 revenue of RM1,346mil surged 61% as core apparels and footwear segment improved by 59% to RM1,352mil. The strong result was fueled by continuous pick up in the postpandemic economy. Meanwhile, its management service segment posted higher revenue of RM136mil (+41% YoY). Consequently, 9MFY23 earnings soared 2.2x YoY to RM165mil.

• Likewise, 3QFY23 earnings expanded 33% YoY bolstered by 39% YoY growth in revenue as the economy gained a firmer footing.

• QoQ, 3QFY23 bottomline decreased by 42% as revenue seasonally dropped 10% in the absence of festive and school holiday sales. This was exacerbated by an increase of 64% QoQ in administrative expenses which included bonus payout and salary adjustment, alongside a higher effective tax rate (+1.5%- point).

• The group declared a fourth interim (2.5 sen/share) and special (1.5 sen/share) dividends amounting to 4.0 sen/share, bringing up its 9MFY23 total dividend to 7.5 sen/share. This remains in line with our FY23F DPS of 12 sen/share.

• Moving into 4Q, we expect sequential earnings to continue improving, banking on festive sales such as Hari Raya. Given that its 3QFY23 gross margin of nearly 40% (+0.5%-point QoQ, +0.4%-point YoY) has been well-maintained within the prepandemic range of 39% - 41%, we think that Padini was able to pass on the increase in cost to end-consumers to a large extent.

• Moreover, Padini could be one of the beneficiaries of China’s reopening borders, in which we expect to see more footfalls from returning Chinese tourists.

• The group currently trades at FY23F PE of 11x, lower than its 10- year average of 16x while offering a decent yield of 3%.

Source: AmInvest Research - 30 May 2023