Padini, has reported disappointing financial results for its 1QFY24 period. Its core net profit declined by 45% due to rising costs, despite a slight increase in revenue. The company attributes this to sustained high inflation and the impending subsidy rationalisation, which are impacting the consumer discretionary sector.
Kenanga Investment, has lowered its net profit forecasts for Padini for FY24-25F by 38% and 33%, respectively. It has also downgraded its call to UNDERPERFORM from MARKET PERFORM and lowered its target price by 29% to RM3.20.
Padini’s net profit of RM26.7m was below expectations, accounting for only 11% and 12% of Kenanga’s full-year forecast and the full-year consensus estimate, respectively. The variance against the forecast was largely due to higher input, staff, and advertising and promotion costs. The company has proposed a DPS of 2.5 sen, which is in line with historical trends. Kenanga expects the group to declare a total of 10.0 sen DPS for the full financial year, translating into a 43% dividend payout, also in line with historical trends.
Year-on-year, Padini’s revenue rose by 2% due to pent-up demand after the economy reopened. However, its core net profit fell by 45% due to higher input and operating costs. Quarter-on-quarter, its revenue declined by 19% in the absence of major festivities, and its core net profit fell by a steeper 54%.
Padini anticipates a challenging CY24 due to global economic headwinds and sustained inflation, which are hurting consumer spending. The impending subsidy rationalisation may further exacerbate inflationary pressure, reducing the spending power of the M40 group, Padini’s target customers. While Padini has no immediate plans to increase product prices, it plans 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. The company predicts that its gross profit margin will ease to 36%-38% from c.40%.
Kenanga values Padini at a 20% discount from the segment’s average historical forward PER of 15x to account for the weakened spending power of its target customers in the M40 group. The house has turned cautious on Padini due to sustained high inflation and the impending subsidy rationalisation, which are weighing on the consumer discretionary spending sector and its target customers in the B40 group. It is also concerned about the downward pressure on Padini’s margins from rising input and operating costs and potentially heavy discounting to defend its market share.
