PADINI expects single-digit revenue growth over the next 3-5 years, driven by targeted marketing efforts, an expansion in value-oriented product offerings, and continued strategic store optimisation. The current economic challenges in China could provide it with the opportunity to fine-tune its supply chain. We maintain our forecasts, TP of RM5.65 and OUTPERFORM call.

We walked away from PADINI’s post-results briefing feeling assured of its near-term prospects. The key takeaways are as follows:

1. PADINI anticipates achieving single-digit revenue growth over the next 3-5 years, bolstered by: (i) consistent marketing initiatives to enhance brand recognition and sales, (ii) expanding the offering of value-for money products, such as in the sportswear segment, and (iii) ongoing store optimisation strategies, which include maximizing profitability by retaining and expanding high-performing stores while shuttering underperforming locations. The group’s GP margin, meanwhile, is expected to fall within the 36%-42% range, contingent upon its products mix. While PADINI has not explicitly provide guidance on its specific targeted revenue growth rate, we believe it will likely fall within the low to-mid single digit range, in view of the ongoing inflationary pressures that may influence consumer discretionary expenditures. As a result, we have imputed a consecutive 2% revenue growth and a 40% GP margin into our FY24-25F financial models.

2. PADINI perceives the current economic challenges in China as an opportunity to fine-tune its supply chain, especially considering that 60% of its suppliers are based in China. The group’s strong cash position, coupled with its practice of cash-based settlement arm it with enhanced negotiating leverage in pricing discussions.

3. PADINI has not articulated any specific target for new store openings in Malaysia but has plans to inaugurate one new outlet in Thailand in FY24. The latest strategic direction implies a more cautious stance on store expansion, favouring the optimisation of existing locations over the establishment of new ones. We consider this to be a prudent approach, especially considering the current softer retail market. We have assumed an addition of two stores in our FY24-FY25F models.

Forecasts. Maintained.

We maintain our TP of RM5.65 based on 15x FY24F PER, in line with the average historical forward PER of department stores/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 - 29 Aug 2023