Investment Highlights

• We maintain BUY call on Padini with a lower fair value of RM4.68/share (from RM5.70/share previously), based on rolled forward CY24F PE of 16x – at parity to its 10-year average. This reflects an unchanged neutral ESG rating of 3-star.

• We reduce FY24F-FY26F net profit by 18%-22% to account for lower sales and gross margin assumptions, which were impacted by softer consumer sentiments.

• 1QFY24 core earnings of RM27mil came below expectations, reflecting 11% of our earlier FY24F net profit and 12% of consensus. As a comparison, 1QFY23 accounted for 22% of FY22 net profit.

• The group declared an interim dividend of 2.5 sen per share, as expected.

• YoY, the group’s 1QFY24 revenue increased marginally by 2% thanks to higher store traffic which increased sales volume. However, net profit declined by 45% YoY due to the decline in gross profit margin by 3%-point to 36%, which was partly attributable to higher staff costs. We believe product mix skewed towards lower margin products amid high inventory levels.

• QoQ, 1QFY23 revenue slid by 19% mainly due to lower footfalls as the previous quarter benefited from Hari Raya and mid-term school holidays. Coupled with unfavourable product mix which caused gross profit margin to slip by 2.9%-point QoQ, 1QFY24 net profit to halve QoQ.

• Looking ahead, we are cautious on FY24F revenue growth against the backdrop of weaker purchasing power due to economic challenges and inflationary pressures. However, we expect stronger sales over the next 2 quarters due to festive seasons and school holidays.

• Padini’s margin prospects continue to remain favourable from lesser promotional bundled deals and lower freight costs coupled with management’s strategy to skew product mix towards higher margin products.

• The group currently trades at an attractive FY25F PE of 12x, lower than its 10-year average of 16x while offering a decent yield of 3%.

Source: AmInvest Research - 1 Dec 2023