Positive outlook but cost pressures persists
Maintain BUY with lower TP of MYR4.10
We expect PAD to benefit from improved consumer spending in sequential quarters with consumers gradually returning to pre-pandemic routines and given the unlikely recurrence of national lockdowns in view of high vaccination rates. However, margin contraction may materialise if PAD is unable to offset rising cost of production with better product mix going forward. We reduce our FY22-FY23E earnings estimates by 7%- 9% and derive a lower TP of MYR4.10 (20x CY23 PER, +0.5SD to mean).
Emerging signs of consumer down-trading
PAD posted stronger FY21 operating profit of +27% YoY (EBIT margin: +3.8ppts YoY) despite weaker revenue (-9% YoY) mainly due to lower salary expense and depreciation of right-of-use assets given the
slowdown in new store openings. However, we expect sales trends to turn positive in FY22. We understand that overall store transaction volumes have sustained despite recent spikes in new COVID-19 cases. Its “Brands Outlet” stores which have a lower average product price point versus its “Padini Concept Stores” have also experienced a faster pace of recovery post-lockdown.
Balancing cost pressures with better product mix
Management shared that cost pressures (material, freight cost) are likely to have a larger impact on earnings in FY22 as they has risen by c.5-10% YoY. To mitigate this, certain new product launches could see an upward revision in pricing to offset higher cost of production. Separately, PAD is also facing store labour shortages (stores are currently c.10% understaffed) which could partially hinder its sales recovery potential.
Revising FY22-FY23E earnings estimates
Topline growth is expected to improve in 2HFY22 led by normalised store operations and improved store traffic. That said, we prudently lower our FY22/FY23E earnings estimates by 9%/7% after adjusting for gross profit margin contraction of c.1% p.a. to impute for rising raw material costs. FY24 estimates are unchanged. A mitigating factor will arise from PAD’s ability to up-sell higher margin items during the festive seasons in 3Q and 4QFY22. We also lift our DPS estimates to pre-pandemic levels of 10sen p.a. (from 7.5sen p.a.) in FY22-FY24E.