We came away from the PADINI’s analyst briefing feeling cautious with the following key takeaways:

i) Build-up in inventories but still manageable;

ii) Staff costs will remain elevated;

iii) No more new stores in the pipeline.

Reiterate Buy with a lower target price of RM4.70/share (from RM5.10/share) based on 15x CY24 EPS.

Build-up in inventories but still manageable

In FY23, PADINI saw a threefold increase in inventories that stood at RM433.2mn (compared to RM137.3mn in FY22), which primarily attributed to lower-than-anticipated sales during the Hari Raya festive season and disappointing sales performance in specific outlets. However, PADINI has assured that the inventory level remains manageable and plans to accelerate turnover through a diverse mix of promotions. That said, we are wary on PADINI’s optimistic tone as the buildup could potentially indicates a slowdown in consumer demand for apparel products against the backdrop of normalising buying trend in endemic phase.

Staff costs will remain elevated

Following salary adjustments that took place in May 2022 and January 2023 in pursuant to the new minimum wages order in Malaysia, PADINI’s salaries expenses have ramped up to RM179.2mn (+54.9% YoY) in FY23. We anticipate that the staff costs will see a low-single-digit growth in FY24 in tandem with expansion of personnel size across the board. That said, we are cautious on the potential impact of the new progressive wage system (PWS) that will be tabled during the upcoming National Budget 2024 in October and expected to be effective from 2HCY24 onwards. The PWS transitions from the standard minimum wage model to a structured, growth-responsive wage progression, which could have implications on EBIT margins.

No more new stores in the pipeline

PADINI is putting its new store expansion initiative on halt due to the oversaturation of mall openings, particularly in the Klang Valley region. Conversely, priority will be given on elevating store quality through improved sales performance and product value. To recap, PADINI has 50 Brands Outlet stores (-1 YoY), 44 Padini Concept Stores (-1 YoY), 30 Free Standing Stores (+3 YoY) and 11 consignment counters established as of end-June 2023. Furthermore, underperforming and low-footfall stores will be closed to optimize sales efficiency.

Impact

We tone down our FY24-26F earnings forecasts by 9.7%/6.7%/4.2% respectively to reflect rising salary expenses in line with continuous hiring process

Valuation

Reiterate Buy on PADINI with a lower target price of RM4.70/share (from RM5.10/share) based on 15x CY24 EPS.

Source: TA Research - 29 Aug 2023