Investment Highlights

• We downgrade Padini to HOLD from BUY with a lower fair value (FV) of RM3.62/share (from RM4.58/share previously), based on CY24F PE of 13x (from 16x) – 0.5 standard deviation below its 10-year average. The lower PE stems from weaker consumer sentiments and dampened spending power. Our FV also reflects an unchanged neutral ESG rating of 3-star.

• 1HFY24 earnings of RM80mil came below our expectation, reflecting 41% of our but within consensus forecast. As a comparison, 1HFY23 accounted for 55% of FY23 net profit.

• Hence, we reduce FY24F-FY26F net profit by 5%-10% to account for lower gross margin assumption impacted by softer consumer sentiments and unfavourable product mix.

• The group declared an interim dividend of 2.5 sen per share, which brought 1HFY24 total dividend to 5.5 sen per share, translating to a 45% payout.

• YoY, the group’s 1HFY24 net profit dropped by 35% mainly due to gross margin sliding by 2.1%-point to 37.2% and higher distribution costs, likely impacted by rentals. We believe the lower gross margin is likely due to less favourable product mix skewed towards lower margin products amid high inventory levels.

• QoQ, 2QFY24 revenue grew by 29% mainly due to higher footfalls during the festive season and school holidays. Coupled with favourable product mix, which caused gross profit margin to improve by 2%-point QoQ to 38% and normalising staff costs, 2QFY24 net profit almost doubled to RM53mil.

• Looking ahead, we are cautious on FY24F revenue growth, underpinned by weaker purchasing power due to economic challenges and inflationary pressures. However, we expect better contribution in the next 2 quarters due to festive seasons and school holidays.

• We expect Padini's net profit margin prospects to remain favourable with an assumption of 10% and above, backed by better gross profit margin of 36%-40% from lesser promotion deals and lower freight costs, coupled with better product mix skewed towards higher margin products.

• The group currently trades at fairly-valued CY24F PE of 13x, higher than its 10-year trough of 8x while offering a decent yield of 3%.

Source: AmInvest Research - 28 Feb 2024