Below expectations. Padini's 3MFY24 core net profit (CNP) of RM19.8m accounted for 11.9% of our and 11.0% street’s full-year CNP forecast of RM166.3m/RM173.0m, respectively. Despite missing earnings expectations, topline deemed within expectations, accounting for 19.3%/20.0% of both revenue forecasts of RM2.04bn/RM1.96bn, respectively. The weaker quarterly earnings were due to margin contraction, attributed to higher-than-expected staff and depreciation costs.
Proposed dividend. Dividend on 2.5 sen per share, payable on 27 Dec 2024 was declared during the quarter.
QoQ. 1QFY25 CNP declined by -12.8% qoq to RM19.8m (excluding net unrealised forex loss), with a -13.6% qoq decrease in revenue at RM388.2m. The weaker CNP was due to higher OPEX and depreciation expenses. Several larger scale PCS outlets, such as Sunway Pyramid, Sunway Velocity, and Aman Central Mall, underwent refurbishment and maintenance during this seasonally quieter quarter, resulting in higher construction-related depreciation expenses. The decline in top-line revenue was attributed to high base effects from the Hari Raya and school holiday sales.
YoY. 3MFY25 CNP declined -27.3% yoy to RM19.8m; weakness was due to a higher OPEX due to elevated depreciation charges. However, the top-line rose +1.3% yoy to RM388.2m due to higher sales volume.
Outlook. Padini is highly affected by the seasonal shopping trend. This quarter is traditionally a quiet quarter for most retailers. Multiple major contribution outlets (such as PCS and Vincci in Sunway Pyramid, Sunway Velocity) are currently undergoing refurbishment. Most have reopened with promotions such as "11.11", "Black Friday", and grand reopening sales, which should lead to a boost in sales in the next quarter. According to MRA and MRCA estimations, Malaysia's retail sector is expected to grow 3.2% yoy in 4QCY24.
Padini consistently collaborates with several well-known brands include X-Men, Joker, and Harley Quinn, and with future partnerships in the pipeline. Bintulu PCS and Penang ‘s PCS on Portofino brand are coming online in the next quarter could strengthen online presence. Meanwhile, we reckon Christmas and CNY should boost sales in upcoming quarters ahead. Additionally, the first phase of civil servant pay raise taking effect 1 Dec 2024, followed by 7% raise in the second phase in Jan 2025 could boost retail spending and may invariably translate to better sales volume. Therefore, we are optimistic on potential improved sales volumes over the next two quarters.
Earnings revision. For FY25F, we raised OPEX cost by 4.0%. As a result, OPEX will constitute up to 20% of topline to account for higher-than-expected staff cost. Meanwhile, new stores require time to ramp up sales and breakeven. We believe higher personnel costs will weigh onto OPEX in 2025, due to higher headcount from an increased number of operational brick-and-mortar outlets and hike on minimum wage. We have also revised FY26F earnings, inputting (i) a c.1% in GP margin improvement on expectations of a better product mix and (ii) Higher OPEX charges due to higher minimum wage.
Valuation. Downgrade to HOLD recommendation with a lower TP of RM3.13 (from RM3.51). This is based on a P/E multiple of 11.4x pegged to FY26F EPS of 2.8 sen. The ascribe P/E is at 6.0% discount to Padini’s 2-year historical average. Although the retail industry's outlook is challenging, we think Padini will see stronger results in the next couple of quarters due to seasonal effects combined with an increased number of brick-and-mortar outlets in operation.
Risks.Forex volatility may cause short term increases in material cost and freight charges.
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Currency | Buy Rates (RM) | Sell Rates (RM) |
---|---|---|
USD | 4.390206 | 4.425718 |
EUR | 5.008717 | 5.015095 |
CNY | 0.603029 | 0.603828 |
HKD | 0.565660 | 0.569770 |
SGD | 3.345779 | 3.370205 |