PADINI’s FY23 results met expectations. Its FY23 net profit surged 45% YoY on robust sales on the economy reopening. It is stepping up promotional efforts and expanding the offering of value-for money products amidst a softer retail market. We fine-tune down our FY24F net profit by 2%, trim our TP by 3% to RM5.65 (from RM5.80) but maintain our OUTPERFORM call.

In line. PADINI’s FY23 net profit met both our forecast and consensus estimate. It proposed a 4.0 sen DPS, bringing the full-year DPS to 11.5 sen (which is higher than our forecast of 10.0 sen).

YoY. The group’s FY23 revenue surged by 38% on full opening of all retail outlets (vs. lockdowns a year ago). Its EBIT increased by a larger 42% on better cost efficiency with an expanded top line.

QoQ. PADINI’s 4QFY23 revenue rose by 4% underpinned by Hari Raya shopping and better footfall during mid-term school holidays. Its EBIT surged 36% due to: (i) improved cost efficiency on an expanded top line, and (ii) a low base during the preceding quarter which was weighed down by lumpy bonus payments.

Outlook. There are concerns that consumers may cut back on discretionary spending including the purchase of apparel as impulse buying right after the economy reopening gradually wanes, coupled with sustained high inflation that eats into their disposable incomes. However, we take comfort in a relatively stable economy and a healthy job market, coupled with a strong household balance sheet of the T20 and M40 groups, while the B40 group will continue to benefit from various financial assistance programmes by the government especially direct cash handouts. In addition, there has been a gradual return of tourists.

PADINI has stepped up its promotional efforts, with a recent one being Brands Outlets State Election Storewide Promotion (show your inked finger to enjoy 10% off) and the on-going Brands Outlets Merdeka Special (RM10 and below on selected items) (see Page 2). We sense that it is navigating the softer retail market by offering more discounts and expanding the offering of value-for-money products.

Forecasts. We fine-tune down our FY24F net profit by 2% and introduce our FY25F numbers.

Consequently, we lower our TP by 3% to RM5.65 (from RM5.80) based on an unchanged targeted FY24F PER of 15x, in line with the average historical forward PER of departmental store/apparel segment. There is no change to our TP based on ESG given a 3-star rating as appraised by us (see Page 4). Maintain OUTPERFORM.

We like PADINI for: (i) its strong household brands including Padini, SEED, VINCCI and P&Co, (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.

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 - 28 Aug 2023