• Maintain NEUTRAL, new MYR3.50 TP from MYR3.31, 2% downside, 3% yield. While we believe a stronger MYR is positive to Padini, the bulk of the savings could be reinvested to spur consumer spending amidst cautious consumer sentiment. Notwithstanding the unexciting growth prospects due to lack of major expansion plans and elevated operating costs, current valuation is not overly demanding after considering Padini’s established position to capitalise on the hike in civil servant salaries and FX tailwinds.

• Impact of strengthening MYR. We understand that Padini sources the majority of its goods from China, with some obtained from countries like Thailand, India, and Bangladesh. Therefore, a strengthening MYR would translate to lower sourcing costs. For simplicity, our sensitivity analysis assumes all COGS are sourced from China, and we estimate 1% appreciation in MYR/CNY could lead to c.5% increase in Padini's bottomline (Figure 1). However, given the weak consumer sentiment and heightened competition, Padini may need to reinvest the bulk of the savings into more aggressive promotion or marketing initiatives to attract store footfalls and remain competitive. Based on these factors and our revised in-house FX assumption, we raised our FY25F-27F (Jun) earnings estimates by 5%, 8%, and 9%.

• Fashion retail outlook. To recap, Padini reported a 4.4% YoY sales decline in 4QFY24, lagging behind Malaysia's overall retail sales growth of 0.6% for the same period. This is likely due to cautious consumer sentiment on the back of elevated inflationary pressures, which led to a reduction in discretionary spending as well as competition in the fashion retail industry. Meanwhile, management shared that the spending boost from Employees Provident Fund (EPF) withdrawals has been minimal so far. Looking ahead, we anticipate near-term sales for Padini to remain subdued in the absence of major festive periods. Longer-term prospects also appear muted given the company's conservative approach with store expansion while there is currently no plan to launch or acquire new brands to add to the portfolio.

• Steep opex inflation. Staff costs have risen significantly in FY24, with salary expenses up 29% YoY due to rising competition for staff. With the soft sales growth unable to keep pace with rising operating costs, FY24 profit took a beating and dipped 34%, with net margin shrinking 4.6ppt to 7.6%. Staff costs are expected to remain elevated with ongoing market competition and coupled with the lack of topline drivers, we are expecting a slow earnings recovery for Padini.

• Still NEUTRAL. Post earnings adjustment, our DCF-derived TP rises to MYR3.50 (inclusive of 2% ESG premium). Our TP implies 14.3x FY25F P/E, which is close to its mean. Key risks: Higher-than-expected operating costs and weaker-than-expected consumer sentiment.

Source: RHB Research - 7 Oct 2024