• Still NEUTRAL, new MYR3.30 TP (from MYR3.50), 3% downside. Padini’s 1QFY25 (Jun) results fell short of expectations, impacted by weak GPM and elevated operating expenses. We maintain our cautious outlook, given its muted growth prospects (on limited expansion plans to drive revenue), and ongoing margin pressures from steep opex inflation. That said, its valuation is not overly demanding, underpinned by its strong position to capture resilient consumer spending and potential tailwinds from a stronger MYR.

• 1QFY25 below expectations. Core net profit of MYR21m (-21.5% YoY) was at 13% of our and Street’s full-year estimates, below the average of 18-20%. The negative deviation was due to softer-than-expected GPM and higher- than-expected operating costs. Note that we adjusted for unrealised FX losses of MYR9.5m, likely due to the revaluation of USD72.6m in cash holdings (as disclosed in its FY24 annual report). A second interim DPS of 2.5 sen was declared – within expectations – and will go ex on 16 Dec.

• Results review. YoY, 1QFY25 revenue rose slightly by 1.3% to MYR393.1m, which we believe was driven by five net new store additions that offset negative same-store sales growth (impacted by soft consumer sentiment). However, 1QFY25 EBIT margin contracted by 2.6ppts YoY to 6.8%, weighed down by a 0.5ppt decline in GPM to 35.6% from increased discounting, as well as a 10.6% YoY rise in selling and distribution costs due to higher staff expenses. QoQ, 1QFY25 sales and core profit fell 13.6% and 20.8% due to unfavourable seasonality, in the absence of a festive season or holidays to boost sales.

• Outlook. Immediate-term sales are anticipated to improve during the seasonally stronger year-end period, supported by the festive season, school holidays, and earlier Lunar New Year. Beyond the immediate term, we believe Padini will continue to maintain its conservative approach in store expansion, We were not made aware of plans to introduce or acquire new brands. Additionally, staff costs are expected to remain elevated, considering the competitive market conditions. Nonetheless, we foresee earnings improvement ahead, with sales expected to be lifted by higher wages in 2025F and upsized cash handouts to the lower-income groups. Meanwhile the stronger MYR should translate to lower sourcing costs – we forecast FY25F GPM of 36.8% vs 1QFY25's 35.6%.

• Forecasts and ratings. Post results, we cut FY25-27F earnings by 7%, 6% and 5% to account for our new GPM and opex assumptions. Correspondingly, we cut our DCF-derived TP to MYR3.30 (inclusive of a 2% ESG premium). Our TP implies 13.8x CY25F P/E, which is close to its mean.

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

Source: RHB Securities Research - 2 Dec 2024