PADINI saw losses in 1QFY22 on account of the FMCO and the very gradual reopening early on under the NRP. Moving forward with the reopening of the economy, we expect surging improvement due to year-end demand and incoming festivities ahead. No change in our FY22E earnings and TP of RM3.20. Call is upgraded to OP following the stock’s price decline since our last report.

Broadly within expectation. Padini registered LATAMI of RM17m for 1QFY22 against our/consensus full-year estimates of RM95m/RM99m as earnings lost ground from the prolonged FMCO. We, however, deemed this as within our/consensus expectation on the premise of earnings regaining traction in the subsequent quarters following the usual end-of-year sales and festivities ahead and beyond that, normalisation of the economy. On a positive note, PADINI has reverted to its usual declaration of an interim dividend for the quarter at a DPS of 2.5 sen/share (in line).

YoY, 1QFY22 revenue fell sharply by 74% to RM81m due to the prolonged FMCO which ended on 18th August followed by the gradual reopening under the National Recovery Phases. Note that 50% of its outlets are in the Klang Valley (~65 outlets). Gross margins fell 5ppt to 33% due to higher freight charges as China contributed c.60% of the supply chain. EBITDA margin saw a 7ppt erosion on account of the fixed operating expenses i.e. rental.

QoQ, sales fell 61% (rough estimate – 62 business days of closure vs 4Q21; 31 days). Margins erosion saw a similar disposition (6- 7ppt erosion) QoQ, indicating prudent management since the pandemic started.

Resurgent demand ahead. Since the economy has gradually reopened amid high vaccination rate, we expect strong sales ahead in the coming quarters due to: (i) usual end-of-the year demand and two major festivities ahead; Chinese New Year and Hari Raya. Margins would still be a challenge due to supply chain issue but we expect margins to improve moving into 2HFY22.

Post results, our FY22E/FY23E earnings of RM95m/RM140m remained unchanged with impact of the Prosperity Tax likely to be minimal given the presence of several business units in its corporate structure.

OUTPERFORM. Our TP is maintained at RM3.20 pegged to a 5- Year mean PER of FY22E. We feel this is justified given: (i) the reopening of the economy, and (ii) solid net cash of RM518m (or RM0.80/share) – implying another potential bumper dividend payout (FY14/FY15 at 83%/82%). Upgrade to OUTPERFORM following a sharp 13% decline in share price from its October peak.

Risks to our call: (i) another wave of the pandemic and (ii) higher- than-expected operating expenses.

Source: Kenanga Research - 29 Nov 2021