• U/G to BUY from Neutral, new DCF-derived MYR3.95 TP from MYR3.15, 23% upside, c.4% FY22F (Jun) yield. 9MFY22 earnings beat expectations, with the higher footfall and consumer confidence post lockdown underpinning the strong sales performance. We continue to like Padini for its branding of value-for-money offerings, and look forward to possible expansion plans with the transition to endemicity. Trading below mean, its valuation is attractive, considering its positioning as a strong recovery proxy – poised to benefit from the potential market consolidation.

• 9MFY22 earnings above estimates. Padini reported 3QFY22 earnings of MYR32.6m, bringing 9MFY22 earnings to MYR76.7m. In expectation of a robust 4QFY22 driven by Aidil Fitri festivities and stronger purchasing power, we deem the results to have exceeded expectations at 70% of our full-year estimates and 82% of consensus’.

• Results review. YoY, 3QFY22 revenue of MYR329.3m was up 25.3% from higher footfall and stronger sales performance, as all outlets were operating at full capacity in line with the country’s high vaccination rates. Correspondingly, 3QFY22 earnings surged by 167.6%, supported by cost- optimisation efforts on the labour front, and subsidy wages received during the period. QoQ, 3QFY22 revenue and profit fell 22.9% and 46.5% from last quarter’s peak, due to seasonal factors and waning pent-up demand, in our view. Despite the negative QoQ performance, 3QFY22 GPM was up 2.1ppts QoQ, at 39.5%. A dividend of 5 sen was declared for the quarter.

• Outlook. We look forward to Padini’s strong near-term performance being underpinned by robust consumer sentiment given the Aidil Fitri festivities, mass return to office, and cash withdrawals. Looking beyond the near term, with Padini’s close competitors phased out by the pandemic, the likelihood of market share gains should also bode well for the group, translating to better sales growth moving forward. Expansion plans may also start coming into play, in our view, with the nationwide transition to endemicity. However, we await further capex guidance from management at the analyst briefing on 1 Jun. While we maintain cognisance of inflationary pressures that may result in margin compression, we view positively management’s efforts in possibly curating a more favourable product mix that translated to improved QoQ GPM in 3QFY22.

• U/G BUY. In expectation of a strong 4QFY22, we raise FY22F earnings by 20%. Immaterial changes were made to FY23F-24F earnings. Refreshing our CoE assumptions, our DCF-derived TP is raised to MYR3.95, implying 18x 2022F P/E (+0.5SD from its 5-year mean), and incorporating a 2% ESG premium, as its 3.1 ESG score is above the country median.

• Risks include a sharp rise in operating costs, and weaker-than-expected consumer sentiment.

Source: RHB Research - 30 May 2022