• Maintain HOLD (TP: RM3.80). Padini’s 1HFY24 net profit of RM79.8mn (-34.6% YoY) was in-line with our and consensus expectations, accounting for 48% and 47% respectively. The group declared a 3rd interim DPS of 2.5sen, bringing YTD DPS to 7.5sen (same as 1HFY23: 7.5sen). We estimate a total FY24 DPS of 10sen (c.40% payout), translating into a DY of 2.9%. On a QoQ basis, Padini reported a revenue increase to RM500.1mn (+28.8% QoQ) and a net profit increase to RM53.1mn (+99.1% QoQ) for 2QFY24. The outstanding performance was mainly driven by strong consumer spending amidst the year-end seasonality and festivities. Moving forward, we are cautious on Padini cost pressures as we expect operating costs to persist at higher levels in the near term, particularly in labor and raw material costs. Maintain HOLD call with TP of RM3.80, pegged at PER of 14x (Padini’s -0.5SD 5-years average historical forward PE) to CY24 EPS of 27sen. The lower valuation is to reflect the cautious retail outlook, 2H2024 inflationary pressures, and potential lower spending power from the M40 group.

• Key highlights. Padini’s 2QFY24 revenue increased by 28.8% QoQ to RM500.1mn, mainly attributed to strong seasonal sales during Christmas and year-end school holidays. Net profit jumped further by 99.1% to RM53.1mn, with GP margin expanding 2.0 ppts QoQ to 38.1%, which we believe to be a result of a favourable product mix against the backdrop of stronger sales. However, Padini’s 1HFY24 revenue was stagnant and net profit fell by -34.6% YoY to RM79.8mn. This was mainly due to overall higher input costs (GP margin dropped by 2.1 ppts YoY to 37.2%) and rising staff costs.

• Earnings Revision. No changes to our forecast

• Outlook. Moving forward, management will focus on providing value for money and enhancing product quality to maintain competitiveness. Nevertheless, we remain cautious on Padini's near term earnings growth outlook. Despite the company benefiting from consumer down-trading trends, the sales momentum could be hindered by lower spending power from the M40 group due to anticipated 2H2024 inflationary pressures and higher operating costs for Padini (i.e., labor, distribution, and raw material costs), potentially eroding profit margins.

Source: BIMB Securities Research - 28 Feb 2024