This article first appeared in Capital, The Edge Malaysia Weekly on September 9, 2024 - September 15, 2024

TO investors who have not followed the growth story of Padini Holdings Bhd (KL:PADINI), it may come as a surprise that the garment manufacturer’s current market capitalisation stands at above the RM2 billion mark, putting it in the same league as big-cap heavy industry players like WCE Holdings Bhd (KL:WCEHB, RM2.14 billion), which is in the business of construction and highway toll management, and HUME Cement Industries (KL:HUMEIND, RM2.12 billion) in the building materials industry.

In fact, Padini’s market valuation is even larger than Ranhill Utilities Bhd’s (KL:RANHILL) current market value of RM1.71 billion, which says something given the latter’s perceived exposure to the data centre mania, while being above that of its retail peers on Bursa Malaysia such as Bonia Corp Bhd (KL:BONIA), Carlo Rino Group Bhd (KL:CRG) and Focus Point Holdings Bhd (KL:FOCUSP), which are valued at RM316.7 million, RM229.6 million and RM351.1 million respectively, as at Sept 5. Department store operator Aeon Co (M) Bhd (KL:AEON), which has a broad range of offerings such as clothes, household goods and food, is valued at RM2.01 billion.

Padini’s declining stock performance over the past year suggests that the market may be mulling its value proposition in the light of risks such as margin compression and rising competition in the retail space.

As the economy pushed back against the collective adverse effects of the Covid-19 pandemic and other headwinds in recent years, Padini emerged as a beneficiary of revenge spending and Employees Provident Fund (EPF) withdrawals, and was subsequently seen as a proxy to the gradual shift in consumer spending towards affordable wear as people tightened their purse strings amid high inflation.

Padini’s share price surged to a multi-year high of RM4.11 in April 2023, a level not seen since November 2018. However, it had tapered off from its high to close at RM3.35 last Thursday, down 14.76% over the last 12 months.

For its fourth financial quarter ended June 30, 2024 (4QFY2024), Padini’s net profit more than halved to RM26 million from the previous corresponding period, putting the full year’s net profit at RM146.6 million, which was 34% lower than the RM222.7 million recorded in FY2023. This was despite FY2024 revenue coming in 5.3% higher at RM1.92 billion. Revenue for 4QFY2024 was down 4.5% year on year to RM455 million, which the group attributed to lower outlet sales, while the lower quarterly net profit was due to rising staff costs.

The garment company carries brands like Vincci, Seed, Padini Authentics, PDI, Miki Kids, P&Co, the Brands outlet and multi-branded Padini Concept Stores locally; as well as the Brands outlet and Padini Concept Stores in Cambodia; and Vincci in Thailand.

According to its 2023 annual report, domestic operations accounted for about 96.8% of the group’s consolidated revenue in FY2023, marginally higher than the 96% in FY2022.

Analysts note that Padini’s FY2024 net profit came in below expectations as it was hampered by higher-than-anticipated administrative expenses of RM91.7 million as well as selling and distribution costs amounting to RM416.8 million.

Notwithstanding the weak performance in FY2024, former investment banker and private investor Ian Yoong tells The Edge that Padini’s dividend yield of 3.5% and net cash position of RM791 million as at June 30, 2024 — representing 36% of its market capitalisation of RM2.24 billion — are positive attributes.

“Padini managed to eke out a 5.3% increase in revenue with a net increase of five stores. The weakness in its share price after declining 15% from the 52-week high of RM4.01 presents an opportunity for value investors. The days of high growth, however, are over,” Yoong contextualises.

He adds that in FY2025, Padini will need to address its high operating expenses as well as deteriorating same-store-sales growth, which declined 10.7% quarter on quarter in 4QFY2024.

Despite its challenges, Padini has traditionally dished out handsome dividends of up to 11.5 sen as seen in FY2024, FY2023 and FY2019. During the challenging years of the Covid-19 pandemic, the group continued to pay dividends of 2.5 sen in FY2021 and 10 sen in FY2022.

Following the release of its 4QFY2024 financial results, the group has proposed to undertake a bonus issue of up to 328.95 million shares on the basis of one bonus share for every two existing shares held to reward shareholders. As at July 31, the home-grown fashion retailer had an issued share capital of RM69.56 million comprising 657.91 million shares.

That Padini’s price-earnings ratio (PER) of 15.04 times is lower than the Bursa Malaysia Consumer Product Index’s average of 17.42 times has MIDF Research reiterating that the counter is undervalued. The research house tells The Edge that it is maintaining its positive stance on the counter, believing that it will continue to benefit from solid demand for its competitively priced products as consumers shift towards value fashion products in the current inflationary environment.

“This demand is further supported by a stable job market, progressive wage policies for public servants and the EPF Account 3 withdrawals. Padini will likely see better performance during festivities, which 2QCY2024 was lacking,” says MIDF Research. It believes that Padini’s share price movement is reflective of the “lacklustre performance in the overall consumer sector since May”.

The research house has a “buy” call on the stock, with an unchanged target price of RM4.30. With Padini’s prospects, it estimates a dividend per share (DPS) of 12 sen for FY2025, which translates into a dividend yield of 3.7%.

However, analysts who are “neutral” on the stock are of the view that Padini’s near-term outlook could be challenging due to the weakened spending sentiment during the long period of high inflation and consumers’ anxiety over the second part of the fuel subsidy rationalisation in 2H2024. Volatile raw material costs and a relatively weak ringgit are also seen as contributors to margin compression.

“While we understand Padini has no immediate plan to raise product prices, it hopes to defend its margins through inventory and store optimisation,” Kenanga Research, which has a “market perform” call and a lower target price of RM3.24 from RM3.63 previously, said in an Aug 28 report.

Bloomberg data show that of the 10 analysts covering Padini, four have a “buy” rating and six “hold”, with a consensus target price of RM3.71, implying an upside of 10.7% from last Thursday’s closing price.

Looking at Padini’s long-term prospects, its stores are large, often occupying multiple lots as a key retail player in a mall, hence incurring high rental rates. Its most formidable competitors, as Yoong points out, are e-commerce retailers who are able to sell products below cost.

“The trend in the US and Europe is for physical stores to downsize floor space. The average retail space floor area in the US as at the third quarter of last year was the smallest in two decades [according to a study]. These smaller stores are not competing with online retail. They are adapting to complement it,” says Yoong.

“The heyday of large sprawling department stores is over. The smaller stores operate as showrooms, which help customers view products that they can order online. These stores rely on data from online shoppers to determine what to sell in a downsized store’s limited floor space.

“Channel checks reveal that Padini’s online presence is still in its infancy. The company has yet to follow the herd in transitioning to smaller stores at this juncture.”

As MIDF Research points out, physical stores “will still carry on with this niche given consumer proclivity to spend time in shopping malls”. Whether Padini will need to pivot to move with the times will not be as crucial as needing to deal with the high operating expenses on its books.

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