PADINI’s 9MFY23 missed our forecast but beat market expectation. A healthy top line growth was partially offset by  higher cost. Its outlook will remain strong with sustained  consumer spending and the return of tourists. We cut our FY23- 24F net profit forecasts by 5% and 3%, respectively, trim our TP by  3% to RM5.80 (from RM6.00) but maintain our OUTPERFORM call.

Below expectations. 9MFY23 net profit missed our expectation at only  70% of our full-year forecast but beat market expectation at 80% of the full-year consensus estimate. The variation against our forecast came largely from higher operating and administrative cost.

YoY, 9MFY23 revenue rose 61% driven by strong sales and higher store traffic at outlets on the economy reopening. Net profit more than doubled on a better product mix that was skewed towards higher-margin products, and improved cost efficiency on higher sales.

QoQ, 3QFY23 revenue declined by 10% from a high base during the preceding quarter due to Christmas and early Chinese New Year festive shopping. Net profit decreased by a larger 41%, mainly due to higher administrative cost such as bonuses and salary adjustments.

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. An additional earnings kicker will come from the return of international tourists.

Forecasts. We cut our FY23-24F earnings forecasts by 5% and 3%,  respectively, to reflect higher operating cost.

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. B40 and 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 trim our TP by 3% to RM5.80 (from RM6.00) based on an  unchanged 15x FY24F PER, 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 - 30 May 2023