• Keep NEUTRAL, with new MYR3.31 TP from MYR3.68, 1% upside. Padini’s 4QFY24 (Jun) results missed estimates on softer-than-expected margin. We expect the soft GPM to persist amid aggressive promotions, driven by steep competition and soft consumer sentiment, while the operating cost environment is expected to remain elevated. Current at-mean valuation seems fair and has priced in the downside risk, supported by its sturdy balance sheet (net cash of MYR791m or MYR1.20/share as at FY24) and strong cash flow generation.

• Below expectations. FY24 core net profit of MYR146.6m (-34.2% YoY) was below expectations, at 95% and 87% of our and Street full-year estimates. The negative deviation was due to higher-than-expected opex on rising staff costs. A first interim DPS of 2.5 sen was declared and will go ex on 12 Sep. It also announced a 1-for-2 bonus issue which is expected to be completed in 4QCY24.

• Results review. YoY, FY24 revenue rose 5.3% to MYR1.9bn, likely due to more aggressive promotional initiatives aimed to drive sales, with GPM slipping 3.2ppts to 36.2%. Note that 4QFY24 SSSG was at -10.7% YoY due to the higher base in 4QFY23, which captured the longer Raya festive period (2024: 10 Apr vs 2023: 23 Apr). FY24 EBIT margin dipped 6ppts to 10.5% from GPM dilution and rising staff cost (selling & distribution expense: +21% YoY). QoQ, 4QFY24 revenue fell 20.9% to MYR455.2m due to the absence of a festive season which had boosted sales in 3QFY24. Consequently, core profit dipped 35.1% QoQ to MYR 26.3m.

• Outlook. We expect 1QFY25 sales to remain soft due to the absence of festive events and extended holidays that typically boost consumer spending. While Padini stands to benefit from recent positive developments, such as the salary hike for civil servants and the flexible Employees Provident Fund withdrawal scheme, we believe these factors may not be enough to offset the elevated operating costs driven by rising staff expenses amid steep competition. Beyond the immediate term, we think Padini's growth prospects may be subdued as the company adopts a conservative approach to expanding its outlet network. With its outlet presence having reached maturity, new openings will likely be considered only if opportunities arise from new mall developments or particular favourable rental and footfall conditions.

• Forecast and ratings. Post results, we cut our FY25F-26F earnings by 10% and 7% after imputing higher operating cost assumptions, and introduce FY27F earnings (+6.7%). Correspondingly, our DCF-derived TP is lowered to MYR3.31 (inclusive of a 2% ESG premium). Our TP implies 14.1x FY25F P/E, which is close to its mean. Key risks: Sharp rise in operating costs and weaker- than-expected consumer sentiment.

Source: RHB Research - 28 Aug 2024