• BUY, new MYR4.37 TP from MYR4.62, 17% upside with c.4% FY24F(Jun) yield. Padini’s 1QFY24 results missed estimates on softer-thanexpected margins. Notwithstanding FY24F earnings normalising from ahigh base, we highlight that it still represents a healthy 27% growthcompared to FY19. We think the market has yet to fully price in itssustainable high earnings base, considering its established brand equityand it benefiting from downtrading. The stock offers consistent dividendpayouts, supported by a sturdy balance sheet and strong cash flow.

• 1QFY23 results are below expectations. Core net profit of MYR26.7m(-45.4% YoY) came up to 12% of our and Street full-year estimates, belowthe average of 16-18%. The negative deviation was due to a softer-thanexpected GPM and higher-than-expected operating cost. A second interimDPS of 2.5 sen was declared – within expectations – and will go ex on 15Dec.

• Results review. YoY, 1QFY24 revenue grew 2.4% to MYR388.2m on theback of steady sales volume growth despite 1QFY23 being a high base,driven by revenge spending post-lockdowns and special EmployeesProvident Fund withdrawals. However, 1QFY24 EBIT margin slipped7.7ppts to 9.4%, which management attributed to the dilution of GPM – this,in turn, stemmed from an unfavorable product mix and more promotionaldiscounts given, coupled with a spike in operating costs. QoQ, 1QFY24revenue was 18.5% lower due to unfavourable seasonality with 4QFY23lifted by the Aidil Fitri festival. Correspondingly, 1QFY24 core profit plungedby 53.5% QoQ to MYR26.7m.

• Outlook. 2QFY24F earnings should pick up due to better seasonality fromthe year-end festivities and school holidays. Meanwhile, the YoYcomparison may show softer numbers as these should normalise fromrevenge spending post-lockdown, coupled with an environment of higheroperating costs. Looking forward, management does not plan to expand itsnetwork of outlets aggressively, as Padini has reached a mature stage in itsoutlet presence. New outlet openings will be considered only if anopportunity crops up via a new mall opening, or if attractive terms in termsof rental and footfall are available. Instead, the management's priority liesin enhancing product quality and design offerings to sustain and strengthencompetitiveness in the market by offering value-for-money products.Meanwhile, its FY24F GPM is guided to be within 36-38%.

• Forecasts and ratings. Post results, we cut FY24-26F earnings by 8-9%after imputing lower GPMs and higher operating cost assumptions.Correspondingly, we cut our DCF-derived TP to MYR4.37 (inclusive of a2% ESG premium). Our TP implies 14x CY24F P/E, which is -0.5SD fromits mean.

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

Source: RHB Securities Research - 1 Dec 2023