Review

• Padini Holdings Berhad’s (PADINI) 1QFY24 core earnings of RM27.6mn (-41.5% YoY) disappointed, accounting for 14% and 12% of ours and the consensus’s full-year estimates, respectively. The negative variance mainly attributed to lower ASP and higher staff costs.

• The group declared its second interim dividend of 2.5sen/share for the quarter under review (1QFY24: 2.5sen/share), bringing its YTD dividend to 5.0sen/share (1QFY24: 5.0sen/share).

• YoY, 1QFY24 revenue inched up by 2.4% YoY to RM388.2mn, driven by growing sales volume across the stores despite lower ASP. However, its EBIT plunged 43.8% QoQ to RM36.3mn, attributed to higher headcount expenses.

• QoQ, 1QFY24 revenue fell 18.5% QoQ, owing to adjustment downward of the ASP amid the closure of some non-performing stores. Consequently, the EBIT declined 55% due to persist sales discount allocation and escalating administrative cost. Key takeaways from analyst briefing

• The 1QFY24 GP margin was down by 3ppt YoY to 36%, largely attributed to lower ASP as a mean to expedite the turnover of inventory remaining from the slower-than-expected Hari Raya sales in the preceding quarter. That said, the company noted a significant improvement in sales volume during 1QFY24 albeit being a low seasonal period, thanks to sales promotion and discount. Going forward, the company anticipated the annualised GP margin will be hovering at c.37% in FY24.

• We gather that the company does not anticipate any pent-up demand in 4QCY23 before the scheduled SST hike next year. Furthermore, the SST hike announced in Budget 2024 will not significantly impact PADINI's profitability due to its affordable price point. However, traditionally, 4QCY23 represents the peak sales season for retailers, benefitting from the momentum generated by year-end festivities spending.

• The company reaffirmed its commitment to a "quality over quantity" approach in store expansion while simultaneously streamlining its number of stores. To recap, PADINI aims to enhance store quality by providing higher product value, offering diverse product assortments tailored to regional requirements. For instance, stores located outside city centers will prioritize delivering more affordable options to boost sales volume, while main city stores will feature a wider range of product variations.

Impact

• We trim down our FY24-26 earnings forecasts by 16.2%/11.0%/11.0%, respectively, as weighed down by lower ASP amidst escalating OPEX.

Outlook

• As we approach the year-end festive season, we anticipate a boost in retail sales due to increased spending, particularly during Christmas and the preparation for Chinese New Year. Consumer spending is expected to remain resilient, considering the stabilized inflation resulting from the absence of further OPR hikes in CY24. While the company has indicated that supply chain and freight costs are normalising, we maintain a cautious optimism regarding earnings growth due to potential margin erosion caused by rising frontline staff costs. Our confidence, however, is rooted in the brand's well-established track record and its proactive cost optimization measures, leveraging its net cash position.

Valuation

• Reiterate Buy with a lower target price of RM 4.10/share (from RM5.10/share) based on 15x CY24 EPS.

Source: TA Research - 1 Dec 2023