Investment Highlights

• Bonia Corp reports a soft quarter off unexpected aggressive A&P, which is expected to be sustained going forward. We maintain our BUY recommendation. We lower our fair value to RM0.67/share from RM0.75/share as we roll over our valuations against lower earnings.

• Our valuations are pegged to FY19 from CY18 while maintaining our target P/E of 14.5x, in line with its 5-year historical average P/E. We continue to like Bonia for its turnaround-led growth, regional brand recognition and its attractive valuations.

• Bonia’s reported 1QFY18 earnings of RM1.3mil (YoY: - 84%) was off a softer revenue base of RM118.9mil (YoY: - 13%). The results missed both our and consensus expectations, accounting for 3% full-year earnings estimates.

• 1QFY18 is Bonia’s FY18 seasonally weakest quarter given the unfavourable Hari Raya timing against the previous corresponding period. This FY’s Hari Raya-related spending will be recognised in 4QFY18 instead. Correspondingly, SSSG for Bonia contracted 19% YoY. Contrastingly, Braun Buffel saw SSSG up 9% off the back of robust Singapore sales. Apart from that, 26% fewer consignment counters YoY contributed to the overall decline. Going forward, we expect SSSG to pick up in tandem with the gradual recovery in overall sentiment and consumer spending.

• Gross margins improved by 2.5ppts to 60.5% against the absence of a festive period, which is met with promotional exercises. Meanwhile, the shortfall in earnings was solely due to aggressive A&P spending which diluted EBITDA margins by 8.1ppts to 6.5%. Coinciding with Braun Buffel’s 130th anniversary, aggressive A&P is expected to persist going forward.

• That said, we expect earnings to pick up in the subsequent quarters driven by: i) back-loaded Hari Rayarelated spending; ii) cost savings tied to FY17’s rationalisation efforts over suboptimal consignment counters (by our estimates, Bonia realises cost savings of RM1mil for the closure of every 100 non-performing consignment counters); and iii) improving consumer sentiment.

• We adjust our assumptions over Bonia’s more aggressive A&P and factor in a more conservative cost structure. As a result, we trim our FY18F/19F/20F earnings by 23%/18%/18% respectively. Key risks include accelerated operational cost, poor execution and softer-than - expected top-line recovery.

Source: AmInvest Research - 30 Nov 2017