• Maintain BUY with new DCF-derived MYR4.39 TP from MYR3.95, 31% upside. Earnings beat expectations thanks to the stronger-than-expected sales momentum upon the return to normalcy and full operations. Trading below its historical mean, we believe the valuation for Padini will be attractive, backed by its solid branding of value-for-money offerings and store expansion outlook. This is given its large cash pile whilst benefitting from consumer downtrading and possible market share gains from a potential sector consolidation.

• Beating expectations yet again. Padini started the year off strong, reporting 1QFY23 (Jun) earnings of MYR48.9m – a turnaround from 1QFY22’s MYR16.9 net loss. Standing at 33% of full-year estimates, we deem the results as exceeding expectations as we look forward to a strong 2QFY23. YoY, 1QFY23 revenue surged 365.8% to MYR379.1m – driven by the full operations of all stores upon the economic reopening – with a turnaround in bottomline from a MYR16.9m loss in 1QFY22 to a net profit of MYR48.9m in 1QFY23. This was further aided by cost optimisation efforts during this period. On that note, 1QFY23 GPM expanded 6.3ppts YoY, standing at 39.2%, which we believe to be a result of a favourable product mix and effective cost-cutting against the backdrop of stronger sales YoY. A dividend of 2.5 sen was declared for the quarter.

• Outlook. We believe Padini stands to continue benefitting from consumer downtrading in the coming quarters, leveraging on its appeal as a value-for- money brand. This bodes well, especially with fears of a recession looming near come FY23. The group’s ability to maintain GPMs despite inflationary pressures suggests it is able to effectively strategise cost controls, product mix, and price adjustments to withstand inflationary pressures. Additionally, possible market share gains resulting from the phasing out of competitors over the past two years should translate to better sales growth moving forward, in our view. That said, we look forward to Padini’s expansion plans going into FY23, as be we believe it is in prime position to comfortably expand its network after store closures throughout the pandemic given its hefty war chest.

• Maintain BUY. We raise our FY23F earnings by 14% as bottomline was above expectations. FY24F-25F earnings are raised by 13-8% as we adjust our margins assumptions moving forward on the basis of better cost controls. Our DCF-derived TP is raised to MYR4.39 implying 17x FY23F P/E (+1SD from its 5-year mean) and incorporates a 2% ESG premium, considering its ESG score of 3.1 is above the country median

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

Source: RHB Research - 30 Nov 2022