PADINI's FY24 results fell below expectations, with net profit declining by 34% YoY despite a 5% increase in revenue. The growth in the top line came at the expense of margins, reflecting the impact of weak consumer sentiment. Looking ahead, a progressive pay rise for civil servants effective December 2024 would provide some reprieve to retailers like PADINI. However, as passing through cost increases is proving challenging, we lowered our FY25F earnings forecast by 11%, and introduced our FY26 estimate. Consequently, we have reduced our TP to RM3.24 (from RM3.63) but maintain a MARKET PERFORM call.

Below expectations. PADINI's FY24 net profit of RM146m fell below expectations, missing our forecast by 6% and the consensus estimate by a higher 11%. The shortfall was primarily due to higher-than- expected operating costs, particularly in Advertising and Promotion spending. The company declared a final dividend of 4.0 sen, bringing its FY24 total DPS to 11.5 sen, which was in line with our expectation.

YoY, PADINI's FY24 revenue grew by 5%, primarily driven by stronger- than-expected sales in the 3Q, boosted by festive and school holiday shopping periods. However, gross profit weakened by 3% as margins contracted to 36.2% from 39.4% a year ago due to higher input costs.The group’s net profit plunged by 34%, largely due to increased operating costs, particularly in staff expenses and higher A&P, including discounts.

QoQ, its 4QFY24 revenue declined by 21%, largely due to the heightened sales during festive occasions such as Chinese New Year, Hari Raya, and school holidays in the previous quarter. The lower turnover, combined with higher interest expenses, led to a 35% drop in net profit, which fell to RM26m.

Outlook. The near-term outlook in the apparel retailing sector remains challenging due to weakened spending sentiment amidst persistently high inflation and consumers’ anxiety over the impending subsidy rationalisation. On a brighter note, the progressive salary increase for civil servants effective Dec 2024 should at least partially restore consumer spending power.

While we understand PADINI has no immediate plan to raise product prices, it hopes to defend its margins through inventory and store optimisation amid volatile raw material costs, a weak MYR and sustained high staff and distribution expenses.

Forecasts. We trimmed our FY25F net profit forecasts by 11%, after lowering our margin assumptions and introduce our FY26F numbers.

Valuations. Correspondingly, we lowered our TP by 11% to RM3.24 (from RM3.63) based on an unchanged targeted 13.5x FY25F PER, at a 10% discount to the departmental store/apparel sector’s average historical forward PER of 15x to account for the weakened spending power of its target customers, i.e. the M40 group. There is no change to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We like PADINI for: (i) its position in offering value- for-money apparel, which continues to attract budget-conscious consumers; (ii) its potential to benefit from the civil servants' pay rise; and (iii) its strong net cash position, which enables efficient inventory management.

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 2024