• Maintain BUY and MYR4.62 TP, 17% upside, 3% yield. Padini recorded an all-time high revenue and core earnings in FY23, in line with our expectations. We continue to like the company as a prime beneficiary of consumer downtrading in the current inflationary environment. Current below mean valuation is undemanding, considering its established brand equity in Malaysia, sturdy balance sheet (net cash of MYR602m or MYR0.92/share as at FY23), and quarterly dividend payout supported by strong cash flow generation.

• Within estimates. FY23 core earnings of MYR222.7m (+44.5% YoY) came within expectations, at 105% and 103% of ours and Street’s full-year estimates. A first interim DPS of 2.5 sen was declared and will go ex on 14 Sep.

• Results review. FY23 revenue surged 38.1% YoY to MYR1.8bn following the resumption of store operations after the economic reopening, whilst FY22 was at a low base – affected by lockdowns. However, 4QFY23 SSSG was at -2.2%, compared to the high base of 4QFY22, which was driven by revenge spending post-lockdown and special Employees Provident Fund withdrawals. FY23 GPMs expanded 0.9ppts to 39.4%, which we believe was the result of a favourable product mix and ASP adjustments. QoQ, 4QFY23 revenue grew 4.2%, thanks to higher spending during the Aidil Fitri festive season and school holidays. Together with the absence of staff bonus payouts, 4QFY23 core earnings grew 32.1% QoQ to MYR 57.3m.

• Outlook. Despite the softer seasonality expected in 1QFY24F due to the absence of festive seasons, we believe Padini's mass market appeal and value-for-money proposition should enable it to weather the impact of soft consumer spending effectively. Moving forward, management will focus on enhancing product quality and design offerings to maintain its competitiveness. Although our FY24F earnings imply muted growth, we highlight that this came from a high base after a 3-year earnings CAGR of 44%. Essentially, we believe the market has not fully priced in the elevated earnings base yet, which we think is sustainable – given Padini's positioning to capitalise on consumer down-trading amid persistently high inflationary pressures.

• Forecasts and ratings. Our forecasts are largely unchanged, except for the minor effect from the model up keeping exercise. Our DCF-derived TP stays at MYR4.62, implying 13.6x FY24F P/E, which is -0.5SD below its 5- year mean. We incorporate a 2% ESG premium into our TP, 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 Securities Research - 28 Aug 2023