Investment Highlights

• Bonia Corp (Bonia) posts a recovery following 1QFY18’s soft quarter. We expect headway arising from better consumer sentiment, lower A&P and financing cost to persist into 2HFY18. We maintain our BUY recommendation and fair value of RM0.67/share.

• Our valuations are pegged to FY19 with a 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 2QFY18 registered earnings of RM12.0mil (YoY: +7.5%). This brought 1H18 earnings to RM13.3mil (YoY: - 18.4%). It is in line with our but below consensus estimates at 45% and 41% respectively.

• 2QFY18 revenue was lower 6.7% YoY due to the rationalisation exercise of underperforming consignment counters (-16% smaller store base) and sluggish SSSG. In terms of SSSG, Braun Buffel Malaysia was the bright spot, mustering 3% YoY. Meanwhile, foreign markets including Singapore, Vietnam and Indonesia faced intermittent headwinds as SSSG contracted for the quarter (Exhibit 1). It does not deviate widely from our FY18 assumption, which entails a flat SSSG estimate.

• On a cumulative basis, gross margins remain largely unchanged. Contrastingly, EBITDA margins deteriorated by 4.4ppts to 12.7% from 17.1%. This is attributed to A&P spent on Braun Buffel’s 130th anniversary events. That said, we expect margins to revert in 2HFY18 as the A&P exercise has concluded. Bonia’s relatively small earnings base would be positively impacted by its interest cost savings, further furnishing margins going forward.

• Recall Bonia announced the proposed demerger of Carlo Rino on 7 Feb 2018. While there are no material developments since, management did indicate its intention to complete the demerger by end-FY18. Carlo Rino’s contributions constitute about 10% of overall earnings. We reiterate that the corporate exercise offers long-term positives but it could be value destructive in the near term. The potential listing on the LEAP market is likely to command lower valuations and institutional investors’ mandates may restrict the ownership of dividend-in-specie – Carlo Rino shares.

• We maintain our forecast assumptions in view of earnings falling in line. Key risks include accelerated operational cost, softer-than-expected top line and dilutive Carlo Rino demerger.

Source: AmInvest Research - 28 Feb 2018