PADINI’s 1QFY24 results disappointed. Its 1QFY24 core net profit plunged 45% as a tepid top line growth was negated by surging costs. Sustained high inflation and the impending subsidy rationalisation are weighing on the consumer discretionary sector. We cut our FY24-25F net profit forecasts by 38% and 33%, respectively, lower our TP by 29% to RM3.20 (from RM4.50) and downgrade our call to UNDERPERFORM from MARKET PERFORM.

Below expectation. Padini’s 1QFY24 net profit of RM26.7m came in below expectations, accounting for merely 11% and 12% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from higher input, staff and A&P costs. As expected, a 2.5 sen DPS was proposed which aligned with the historical trend. For the full-financial year, we expect the group to declare a total 10.0 sen DPS, translating into 43% dividend payout, in line with its historical trend.

YoY, its 1QFY24 revenue rose 2%, we believe, as pent-up demand post the economy reopening tapered. However, its core net profit plunged 45% due to higher input and operating costs as mentioned above.

QoQ, its 1QFY24 revenue declined by 19% in the absence of major festivities. Its core net profit fell by a steeper 54%, similarly, due to higher input and operating costs.

Outlook. Padini anticipates a challenging CY24 amidst global economic headwinds and sustained inflation, hurting consumer spending. We share the company’s view that the impending subsidy rationalisation may exert further inflationary pressure, crimping the spending power of the M40 group. While Padini has no immediate plans to increase product prices, it hopes to defend its margins by introducing more high-margin products, amidst escalating raw material costs, a weak MYR and sustained high staff and distribution expenses. It guided for gross profit margin to ease to 36%-38% from c.40%.

Forecasts. We cut our FY24-25F net profit forecasts by 38% and 33%, respectively, having reduced our gross margin assumption to 37% from 39.5% to reflect higher input and operating costs.

Correspondingly, we reduce our TP by 29% to RM3.20 based on 12x FY25F PER, from RM4.50 based on 12x FY24F PER previously. At 12x forward PER, we value PADINI at a 20% discount the segment’s average historical forward PER of 15x to account for the weakened spending power of its target customers, i.e. the M40 group. There is no change to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

We have turned cautious on PADINI due to: (i) sustained high inflation and the impending subsidy rationalisation that are weighing on the consumer discretionary spending sector, (ii) its target customers in the B40 group that will be the hardest hit, and (iii) the downward pressure on its margins from rising input and operating costs and potentially heavy discounting to defend its market share. Downgrade to UNDERPERFORM from MARKET PERFORM.

Risks to our call include: (i) a strong recovery in consumer spending as inflation cools or the impending subsidy rationalisation turns out to be less painful to consumers, (ii) industry consolidation keeping competition in check, and (iii) cost pressure eases.

Source: Kenanga Research - 1 Dec 2023