• Keep BUY and MYR4.62 TP (DCF), 23% upside and c.4% yield. 9MFY23 (Jun) core earnings came in above expectations, primarily due to better- than-expected sales and margins. We continue to like Padini as a prime beneficiary of consumer downtrading in the current inflationary environment. Current below mean valuation is undemanding, considering its strong brand equity, increasing market share, and generous dividend payouts.

• Results exceed expectations. 9MFY23 core earnings of MYR165.4m (+115.8% YoY) met 85.2% and 79.9% of our and consensus’ full-year forecasts. The positive deviation was mainly due to stronger-than-expected sales and lower-than-expected opex. A DPS of 4 sen was declared for 3QFY23 (including a special dividend of 1.5 sen), which brought 9MFY23 dividends to 11.5 sen (9MFY22: 10 sen)

• Results review. YoY, 9MFY23 sales rose 60.6% to MYR1.3bn thanks to the resumption of store operations – due to Malaysia’s economic reopening – whilst 9MFY22 was at a low base, affected by lockdowns. GPMs expanded 1.7ppts to 39.5%, which we believe was the result of a favourable product mix. QoQ, 2QFY23 sales dipped 10.3% to MYR457.2m on weaker seasonality. This, together with higher expenses arising from staffing costs due to bonus payouts and salary adjustments, dragged 3QFY23 core profit by 40.7% QoQ to MYR43.4m.

• Outlook. Padini’s value-for-money product offerings positions it favourably to capture consumers looking to down trade in the face of inflationary pressures. We look forward to the company’s strong near-term performance being underpinned by the Aidil Fitri festival, which is historically its highest- yielding festival. Further ahead, we believe FY24 earnings will be sustainable from the elevated FY23 base – notwithstanding the demand normalisation. This will be supported by its expansion plan, stringent cost controls, and increasing market share, in our view.

• Forecast and ratings. Post results, we raised our FY23F-25F earnings by 9.3%, 4.1%, and 2.3%. Our DCF-derived TP is maintained at MYR4.62 after updating our cost of equity assumptions with a renewed beta input after undertaking housekeeping, implying 14.1x FY24F P/E, ie in line with its 5- year mean. Our TP incorporates a 2% ESG premium, as its ESG score of 3.1 is above the country median. Key risks: Sharp rise in operating costs and weaker-than-expected consumer sentiment.

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 30 May 2023