• Downgrade SELL (TP: RM2.60). Padini’s 1QFY25 core net profit of RM21.2mn (excluding unrealised forex loss of RM9.5mn) came in below both ours and consensus expectations, accounting for 12.6% and 12.2% of full year forecasts respectively. The company declared a 2nd interim DPS of 2.5sen, bringing YTD FY25 DPS of 5sen (vs YTD 1QFY24: 5sen). Padini’s 1QFY25 revenue growth marginally by +1.3% YoY, while core net profit declined by -20.8% YoY, primarily due to 1) subdued demand arising from the absence of major festivities in 1QFY25, and 2) higher operating cost. In line with the weakerthan-expected results, we have revised our FY25F/FY26F earnings forecasts downward by -35%/-28%, to reflect the elevated operating costs. Consequently, we downgrade Padini to a SELL call from a HOLD, with a lower TP of RM2.60 (from RM3.60). Our valuation is based on 5-year mean historical forward PE of 16x pegged to FY25F EPS of 16.5sen.

• Key Highlights. On QoQ basis, both Padini’s 1QFY25 revenue and core net profit declined by -13.6% and -20.1% respectively. This is mainly attributable to 1) higher base revenue in previous quarter benefited from school holidays and festivities such as Hari Raya Aidilfitri, and 2) significantly higher operating costs, especially increased staff costs due to the competitive nature of the industry.

• Earnings Revision. We have revised our FY25/FY26 earnings forecast downward by -35%/-2%, factoring in higher operating costs.

• Outlook. We are adopting a conservative stance on Padini, given the challenges of navigating elevated operating costs and growing competition from affordable online alternatives has heightened competition for value-formoney focused retailers. Additionally, the upcoming minimum wage hike, effective February 2025, could exert further pressure on already compressed margins. Padini’s long-term growth prospects could be muted due to management’s conservative approach, with minimal store expansion and a lack of initiatives to strengthen its online sales platform or venture into new markets through brand acquisitions.

Source: BIMB Securities Research - 2 Dec 2024