• Keep NEUTRAL, new MYR3.68 TP from MYR3.74, 5% downside and 3% FY25F (Jun) yield. 9MFY24 results missed estimates on soft GPMs and higher-than-expected opex. We believe the current valuation (+1SD) is fair and has priced in the recent positive developments in the sector. We maintain our cautious stance on Padini, considering the escalating operating cost environment and lack of expansion plans to drive growth.

• 9MFY24 results below expectations. Earnings of MYR120.3m (-27.3% YoY) accounted for 68% and 72% of our and consensus’ full-year forecasts. The negative deviation was due to higher-than-expected opex on increasing staff costs and soft GPMs attributed to the need for more aggressive promotional initiatives. A DPS of MYR0.04 (3QFY23: MYR0.04) was declared and will go ex on 14 Jun, bringing 9MFY24 DPS to MYR0.09 (1HFY23: MYR0.09).

• Results review. YoY, 9MFY24 sales rose 8.8% to MYR1.5bn, likely due to aggressive discounts aimed at driving sales, with GPMs dipping 3ppts to 36.5%. 9MFY24 EBIT margin slipped 5.3ppts to 11.1% due to higher opex (+20% YoY) from staff costs and GPM dilution. QoQ, 3QFY24 sales rose 15.1% from an increase in festive spending and favourable timing of the Lunar New Year and Aidil Fitri festivities. That said, 3QFY24 core profit dipped 23.7% QoQ to MYR40.5m due to a sharp rise in selling & distribution costs (+19.6% QoQ) from higher staff costs and administrative expenses (+70.7% QoQ) due to bonus payouts.

• Outlook. Despite softer seasonality ahead due to the absence of festive periods on the horizon, recent positive developments – eg revised salary scheme for civil servants and Employees Provident Fund or EPF account restructuring – are expected to benefit Padini’s targeted market and support demand. That said, the operating cost environment is likely to remain elevated, driven primarily by escalating staff expenses. Additionally, the necessity to offer aggressive discounts could signal heightened competition within the industry. Hence, management will focus on enhancing product quality and design offerings to maintain its competitiveness. Beyond the immediate term, we believe Padini's growth prospects may be subdued due to its reliance solely on consumption growth and market share gains, considering the conservative expansion strategies in place due to the maturity of its outlet presence.

• Forecast and ratings. Post results, we cut FY24F-26F earnings by 12%, 7%, and 8% after imputing lower GPMs and higher operating cost assumptions. Correspondingly, we cut our DCF-derived TP to MYR3.68 (inclusive of a 2% ESG premium). Our TP implies 14.1x FY25F P/E, which is close to its mean.

• Key downside risks: Sharp rise in operating costs and weaker-than-expected consumer sentiment. The opposite represents the upside risks.

Source: RHB Research - 4 Jun 2024