Investment Highlights

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

• 9MFY24 earnings of RM120mil came within our expectation, reflecting 68% of our full-year forecast and 70% of consensus’. Thus, we maintain FY24F-FY26F net profit.

• The group declared an interim dividend of 2.5 sen per share and special dividend of 1.5 sen per share, which brought 9MFY24 total dividend to 9.0 sen per share, translating to a 49% payout.

• YoY, the group’s 9MFY24 net profit dropped by 27%, mainly due to gross margin sliding by 3%-point to 36.5% and higher administrative costs. We believe the lower gross margin is likely due to less favourable product mix skewed towards lower margin products amid high inventory levels.

• QoQ, 3QFY24 revenue grew by 15% mainly due to higher footfalls during the festive season and school holidays. However, 3QFY24 net profit dropped by 24% due to higher administrative costs on higher bonus payout.

• Looking ahead, we are cautious on FY25F revenue growth given weaker purchasing power amid global economic uncertainties and inflationary pressures.

• 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 lower freight costs, coupled with better product mix skewed towards higher margin products.

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

Source: AmInvest Research - 31 May 2024