PADINI’s 1HFY23 beat expectations on stronger-than-expected consumer appetite for apparel and footwear on the full reopening of the economy. Going forward, festive shopping and the return of international tourists are additional earnings kickers. Hence, we raise our FY23F and FY24F earnings by 53% and 39%, respectively, elevate our TP by 40% to RM6.00 (from RM4.30) and maintain our OUTPERFORM call.

Above expectations. 1HFY23 PATAMI beat expectations, already at 79% and 74% of our full-year forecast and the full-year consensus estimate, respectively. The variation against our forecast came largely from stronger-than-expected rebound in sales on the economy reopening.

YoY, 1HFY23 revenue rose 75% driven by strong sales and higher footfall at outlets on the economy reopening. PATAMI almost tripled on a better product mix that was skewed towards higher-margin products and moderation in operating cost as supply-chain disruptions eased.

Outlook. There has not been a significant slowdown in consumer spending despite the high inflation (thanks partly to government subsidies on fuel and food items, cash handouts to the B40 group and a relatively stable job market). Strong demand for apparel and footwear remains, as it appears that there is still room for consumers to replenish their wardrobes. For 2HFY23, additional earnings kickers could come from strong festive shopping seasons (Chinese New Year in the first quarter and Hari Raya Adil Fitri in the second quarter) and the return of international tourists (especially Chinese tourists).

Forecasts. We raise our FY23-24F earnings by 53% and 39%, respectively, to reflect the stronger-than-expected appetite of consumers for apparel, which appears impervious to high inflation.

We like PADINI for: (i) it being a beneficiary of consumers replenishing their wardrobes for their return to offices and schools, and social functions, (ii) the strong spending power of its primary target customers (i.e. M40 group) given their healthy household balance sheets, and (iii) its strong net cash position enabling it to purchase inventory ahead of price hikes and potential supply disruptions.

We elevate our TP by 40% to RM6.00 (from RM4.30) as we roll forward our valuation base year to FY24F at 15x PER which is in line with the sector’s forward PER. There is no change to our TP based on ESG given a 3-star rating as appraised by us (see Page 4). Maintain OUTPERFORM.

Risks to our call include: (i) competition from existing and new players, (ii) sustained high inflation eventually erode consumers’ spending power, stalling consumption including apparel and footwear, and (iii) rising textile prices.

Source: Kenanga Research - 27 Feb 2023