• Stay BUY, new DCF-derived MYR4.62 TP from MYR4.39, 25% upside, c.3% yield. Padini’s earnings exceeded expectations, thanks to the stronger-than-expected sales momentum amid the year-end festivities. Current 12.2x CY23F P/E (below the industry average) is compelling, as we consider Padini a beneficiary of consumer downtrading in an inflationary environment. We believe Padini is well positioned to gain market share in the event of a consolidation within the fashion retail industry, given the competitive business environment.

• Above expectations. 2Q23 (Jun) record earnings of MYR73.1m (+20.1% YoY, +49.7% QoQ) brought 1H23 earnings to MYR122.0m (+177.1% YoY). Standing at 71.7% and 73.8% of our and consensus’ full-year estimates, the results significantly exceeded expectations. A DPS of 2.5 sen was declared (2Q22: 2.5 sen), bringing YTD DPS to 7.5 sen. (1H22: 5 sen).

• Results review. Padini recorded 1H23 revenue of MYR888.6m (+74.7% YoY) thanks to the resumption of store operations upon the economic reopening, whilst 1H22 was at a low base, affected by lockdowns. QoQ, 2Q23 revenue surged 34.4%, driven by strong consumer spending amidst the year-end seasonality and festivities. YoY, 2Q23 revenue grew 19.3% with GPM expanding 2.0ppts to 39.4%, which we believe to be a result of a favourable product mix against the backdrop of stronger sales YoY. Nevertheless, EBIT margin dropped slightly by 0.5ppts YoY, likely owing to the normalisation of rental rates and wages, with the previous year aided by rental rebates and wage subsidies.

• Outlook. We expect 2H23F sales to be supported by the Aidil Fitri festival, which is the highest yielding festival for Padini historically. We also believe the various measures proposed in the re-tabled Budget 2023 will support consumer spending. Additionally, the easing of supply chain disruptions, normalised material costs and freight charges, coupled with stringent cost controls should lead to stable profit margins ahead, in our view. Essentially, we believe Padini’s value-for-money product offerings place it in a good position to capture consumers’ downtrading, if any, under the inflationary environment. We look forward to Padini’s plans to expand its network (targeting to open c.5 new stores this year) following store closures throughout the pandemic.

• Forecasts and ratings. Post results, we raised our FY23-25F earnings by 14-13%. Correspondingly, our DCF-derived TP was adjusted to MYR4.62, implying a 15.2x CY23F P/E (in line with its 5-year mean). Our TP incorporates a 2% ESG premium, as its ESG score of 3.1 is above the country median.

• Key risks: Sharp rise in operating costs and weaker-than-expected consumer sentiment.

Source: RHB Research - 27 Feb 2023