KUALA LUMPUR (Dec 1): Analysts tracking Padini Holdings Bhd have trimmed their earnings estimates for the group for the financial year ending June 30, 2024 (FY2024) and ahead, amid inflationary pressure, which will crimp consumer spending, and rising input costs, which will eat into its margin, after its latest quarterly earnings missed expectations.
In a note on Friday (Dec 1), MIDF Research said Padini’s core profit after tax and non-controlling interest for the first quarter ended Sept 30, 2023 (1QFY2024) of RM27.3 million was below expectations at 11.6% of the research house's FY2024 projections and 11.9% of consensus.
“Despite topline coming in within our estimates, net earnings were disappointing, hence we cut our projections by 31.8% for FY2024, 26.1% for FY2025 and 24.3% for FY2026,” said MIDF.
This adjustment is attributed to lower gross profit margins resulting from increased sales of low-margin products to enhance footfall, and higher staff costs due to an expanded headcount and increased salaries, the research house noted.
MIDF has downgraded its call for Padini to “neutral”, from “buy” previously, mainly due to a cost-driven factor that has compressed the group’s margin. It also cut its target price (TP) to RM3.50, from RM4.60 previously.
MIDF said that while it is optimistic that the demand for Padini's products will remain resilient due to the relatively cheaper product prices, as well as various cash handouts introduced in Budget 2024, which could boost consumer spending on its products, the research firm turned cautious on inflationary pressure that increased Padini’s operating cost and hence eroded its profit margin.
Padini saw its net profit for 1QFY2024 fall 45.4% to RM26.67 million, from RM48.86 million a year earlier, due to a drop in its gross profit margin to 36%, from 39% previously, partly attributed to rising staff costs. Revenue for the quarter rose to RM388.19 million, from RM379.09 million previously, due to an increase in sales volume.
Padini declared an interim dividend of 2.5 sen per share to be paid on Dec 29.
Kenanga Research also downgraded Padini to “underperform”, from “market perform”, with a lower TP of RM3.20, from RM4.50 previously, as well as trimmed its earnings forecast for Padini.
“At 12 times forward PER [price-earnings ratio], we value Padini at a 20% discount [to] the segment’s average historical forward PER of 15 times to account for the weakened spending power of its target customers, i.e. the M40 group,” said Kenanga.
Kenanga has cut its net profit forecasts for Padini by 38% for FY2024 and 33% for FY2025, having reduced its gross margin assumption to 37% from 39.5% to reflect higher input and operating costs.
As such, the research outfit is now anticipating Padini to deliver an annual net profit of RM152 million for FY2024 and RM175 million for FY2025 — which are significantly lower compared to FY2022's RM223 million.
AmInvestment Bank, meanwhile, said Padini currently trades at an attractive valuation with FY2025 price-earnings of 12 times, lower than its average 16 times while offering a decent dividend yield of 3%.
Hence, AmInvestment Bank has kept its “buy” call for Padini, but with a lower fair value of RM4.68, from RM5.70 previously.
The research house expects Padini to achieve stronger sales over the next two quarters due to festive seasons and school holidays, despite being cautious on its revenue growth for FY2024 amid economic challenges and inflationary pressures.
It also said Padini’s margin prospects continue to remain favourable from fewer promotional bundled deals and lower freight costs coupled with management’s strategy to skew product mix towards higher margin products.
At noon break on Friday, Padini's share price fell five sen or 1.33% to RM3.70, valuing the group at a market capitalisation of RM2.43 billion.
Still, year-to-date, the stock has gained 10%.