• D/G to NEUTRAL from Buy, with lower MYR3.74 TP from MYR4.37, 7% upside, c.4% FY24F (Jun) yield. Padini’s 1HFY24 results disappointed due to lower-than-expected sales and margins, as our previous forecasts were too aggressive. We downgrade our recommendation, considering the subdued growth prospects and lack of exciting catalysts to boost earnings from the high FY23 base. That said, the stock offers consistent dividend payouts, supported by a sturdy balance sheet and strong cash flow.

• Below expectations. 1HFY24 core net profit of MYR79.8m (-34.6% YoY) was below expectations, at 39% and 47% of our and Street’s full-year estimates. The negative deviation was due to lower-than-expected sales and margins, attributed to the need for more aggressive promotional initiatives. Third interim DPS of 2.5 sen (2QFY23: 2.5 sen) was declared, and will go ex on 14 Mar, bringing 1HFY24 DPS to 5 sen (1HFY23: 5 sen).

• Results review. YoY, 1HFY24 revenue was flattish at MYR888.3m (-0.03%) despite coming from a high 1HFY23 base, which was boosted by the economic reopening and EPF withdrawals, in addition to minimal net new store openings (<5 stores). However, 1HFY24 EBIT margin slipped 6.1ppts to 12.2% due to GPM dilution – from an unfavourable product mix and more promotional discounts given – coupled with a spike in operating costs attributed to a higher staff count (as the company was previously understaffed). QoQ, 2QFY24 revenue rose 28.8% to MYR500.1m thanks to favourable seasonal factors during the year-end. Consequently, 2QFY24 core profit rose 99.1% QoQ to MYR53.1m.

• Outlook. 3QFY24 sales should hold up amidst a series of festivities, including the Lunar New Year and early Aidilfitri celebrations (10 Apr). That said, we expect margin pressures to persist due to continued high operating costs and the necessity for promotional efforts to drive consumer spending. Padini may also struggle to pass on the increased service tax costs to consumers, considering the elastic demand and its commitment to providing value-for- money products, thereby further squeezing margins. Beyond the immediate term, Padini's growth prospects may be subdued, as the company opts for a conservative approach to expanding its outlet network. With Padini having reached a mature stage in its outlet presence, new outlet openings will be considered if opportunities arise from new mall openings or attractive rental and footfall terms.

• Forecasts and valuations. Post results, we cut FY24-26F earnings by 8-9% after imputing lower sales and margins assumptions. Correspondingly, we cut our DCF-derived TP to MYR3.74 (inclusive of a 2% ESG premium). Our TP implies 13.6x CY24F P/E, which is close to its mean. Key risks: Sharp rise in operating costs and weaker-than-expected consumer sentiment.

Source: RHB Research - 28 Feb 2024