PADINI's 9MFY24 results met expectations. Its 9MFY24 net profit plunged 27% YoY as it grew top line (+9%) at the expense of margins amidst weak consumer sentiment. A significant pay rise for civil servants effective Dec 2024 should augur well for retailers like PADINI. We fine-tune up our FY24-25F earnings forecasts by 2% and 1%, respectively, lift our TP by 13% to RM3.63 (from RM3.20), and upgrade our call to MARKET PERFORM from UNDERPERFORM.

PADINI's 9MFY24 net profit of RM120m met expectations at 78% and 72% of our full-year forecast and the full-year consensus estimate, respectively. It declared a 1.5 sen special dividend on top of a 2.5 sen fourth interim dividend, bringing its YTD DPS to 9 sen. We raise our full- year DPS forecast to 11.5 sen (from 10 sen).

YoY, PADINI's 9MFY24 revenue improved 9%, thanks to strong 3Q sales during the festive and school holiday shopping periods. However, its net profit plunged by 27%, primarily attributed to higher operating costs, particularly staff cost & A&P expenses including discounts.

QoQ, its 3QFY24 revenue grew 15% due to festive and school holiday sales. However, its net profit fell 24% due to bonus pay0-out and we believe, higher A&P expenses including discounts.

Outlook. PADINI guided for challenging near-term outlook in the apparel retailing sector due to weakened spending sentiment amidst persistent high inflation and consumers’ anxiety over the impending subsidy rationalisation. While we understand PADINI has no immediate plan to raise product prices, it hopes to defend its margins by introducing higher-margin products amid volatile raw material costs, a weak MYR and sustained high staff and distribution expenses. On a brighter note, the 13% salary increase for civil servants effective Dec 2024 should at least partially restore consumer spending power.

Forecasts. We fine-tune up our FY24-25F net profit forecasts by by 2% and 1%, respectively.

Valuations. We lift our TP by a steeper 13% to RM3.63 (from RM3.20) based on a higher targeted FY25F PER of 13.5x. This represents a 10% discount to the departmental store/apparel sector’s average historical forward PER of 15x, narrower from 20% we assumed previously, largely to reflect reduced earnings risk with partial restoration of consumer spending power by the civil servant pay rise. There is no change to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We like PADINI for: (i) its position in offering value- for-money apparel, which continues to attract budget-conscious consumers; (ii) its potential to benefit from the civil servants' pay rise; and (iii) its strong net cash position, which enables efficient inventory management.

Risks to our call include: (i) competition from existing and new players, (ii) sustained high inflation eventually erode consumers’ spending power, stalling consumption including apparel and footwear, and (iii) rising textile prices.

Source: Kenanga Research - 31 May 2024