• Maintain HOLD (TP: RM4.00). Padini’s 1QFY24 net profit of RM26.7mn (-45.4% YoY) fell below both our and consensus expectations, accounting only 12% and 11% respectively. The deviation was mainly due to higher-than-expected operating costs. In 1QFY24, Padini’s revenue and net profit decreased to RM388.2mn (-18.5% QoQ) and RM26.7mn (-53.5% QoQ) respectively. The decline in performance was mainly associated with lower sales during nonfestive periods, coupled with increased expenses particularly the input cost, promotional and staff costs. Moving forward, despite Padini's stable sales, we are cautious on cost pressures as we expect operating costs to persist at higher levels in the near term, particularly in input costs and labour costs. We revised down our FY24f/FY25f earnings by 27%/20% to account for higher operating costs and lower margins. In tandem, our TP is reduced to RM4.00 (previously RM5.00), pegged at an updated PER of 16x (Padini’s 5-year average historical forward PE) to FY24f EPS of 25.1 sen. Downgraded to HOLD from BUY. Padini has declared a 2nd interim DPS of 2.5 sen (YTD: 5 sen), and we estimate a total FY24F DPS of 10 sen, translating into a DY of 2.7%.

• Key highlights. Padini’s 1QFY24 revenue increased by 2.4% YoY, driven by strong sales volume that mitigated the impact of lower average selling prices. However, net profit experienced a sharper decline of 45.4% YoY due to a decrease in GP margin to 36% (-3 ppts YoY) and elevated labour costs especially at the outlet level. On a QoQ basis, both revenue and net profit declined by - 18.5% and -53.5%, respectively, mainly due to a seasonally weak quarter marked by the absence of festive season sales and higher overall operating costs.

• Earnings Revision. We revised down our FY24f/FY25f earnings by 27%/20% as we account for higher operating cost and lower margin.

• Outlook. Padini's sales are expected to remain resilient, driven by the strong spending power of its primary target customers. Management will focus on enhancing product quality and design offerings to maintain competitiveness. However, caution is warranted regarding rising cost pressures attributed to higher input costs due to an unfavourable currency, increased promotional and labour costs. We project a lower EBITDA margin of 19% (-3 ppts YoY) for FY24F.

Source: BIMB Securities Research - 1 Dec 2023