Investment Highlights

• Bonia Corp reports a turnaround quarter, which we think is indicative of its improved prospects ahead. We upgrade our recommendation to BUY from HOLD given its share price decline over the recent months. We have a higher fair value of RM0.75/share from RM0.66/share in tandem with higher earnings.

• Our fair value is derived after pegging a target P/E of 14.5x on its CY18F EPS, in line with its 5-year historical average P/E. We like Bonia for its turnaround-led growth, regional brand recognition and its attractive valuations.

• Bonia’s reported 4QFY17 earnings of RM7.7mil (YoY: +103.3%) brought FY17 core earnings to RM31.1mil (YoY: +26.7%). The results beat both our and consensus expectations, accounting for 111% full-year earnings estimates.

• Revenue for the quarter declined by 4.0% to RM153mil. This was largely due to 22% fewer consignment counters to 984 as of 4QFY17. However, it appeared to be a turnaround quarter with Bonia and Braun Buffel registering SSSG of -1% and 9% respectively. Braun Buffel’s performance was anchored by domestic sales, as it saw a robust +14% SSSG.

• In-store sales has been contracting since 1QFY15, which coincided with the introduction of GST. However, given the multiple YoY quarterly revenue contractions, we imagine for Bonia’s prospect to gradually recover going forward. Braun Buffel has seen 2 consecutive quarters of positive SSSG and narrowing contractions by Bonia point to a sign of recovery.
   
• Meanwhile, FY17 gross margins improved 3.5ppts to 58.6% against higher ASPs. Recall margins contracted to a multiyear low in FY16 (55%) from an average of 61%, off the back of higher USD-led input costs. Given the stability of the forex rates, there may be an upside to margins should management raise ASPs further in FY18. Apart from that, we expect the cost savings associated to the closure of its 22% consignment stores to trickle to its EBIT margins going into FY18.
   
• In view of improved operating conditions, we upgrade our margin assumptions impacting our FY18/FY19F earnings by 8%/11%. We assume a SSSG of 3% and 11 new stores over FY18. Key risks include accelerated operational cost, slower-than-expected store rationalisation and a challenging domestic environment.

Source: AmInvest Research - 5 Sept 2017