Investment Highlights

• Bonia battles falling in-store sales as costs remain elevated. We turn lukewarm on Bonia’s outlook. We downgrade our recommendation to HOLD from BUY with a lower fair value of RM0.49/share (vs. RM0.67 previously). Valuations are pegged to CY19 with a target P/E of 14.5x, in line with its 5-year historical average P/E. While we like Bonia’s regional reach with its brand equity, earnings turnaround is likely to be sluggish ahead.

• Bonia posted a core net profit of RM1.3mil (QoQ: -89%; YoY: - 73%) for 3QFY18 to bring its 9MFY18 core earnings to RM14.6mil (YoY: -39%). It is below both our and consensus expectations at 50% and 47% of estimates respectively.

• Bonia’s key results highlights include: 1. The key deviation was revenue contracting dramatically by 20% YoY for the quarter. This was largely due to SSSG unexpectedly shrinking for both Bonia (-1%) and Braun Buffel (-5%). This is in spite of the quarter seeing favourable seasonal spending. Meanwhile, blended store count was 15% lower YoY for the quarter due to Bonia’s store rationalisation exercise. 2. It appears that Bonia’s turnaround has stalled significantly despite coming off a low base (almost 12 consecutive quarters of YoY SSSG contractions). Additionally, its highend market brand repositioning does not appear to be competitive in the near term. We are wary it may not benefit from improved consumer spending ahead. 3. Positively, gross margins improved sequentially by 2.2ppts due to higher ASPs. Apart from that, A&P that plagued Bonia in the 1HFY18 was noticeably lower in absolute terms as per management’s guidance. However, on a percentage of revenue basis, it offset the GP margin gains with operating margins ultimately contracting by 7.3ppts to 2.3%. 4. Given the operating leverage nature of fashion retail, margins will inevitably shrink in tandem with revenue falling dramatically. Coupled with our expectation of Bonia’s opaque outlook on a topline recovery, we slash our PBT margin assumption by 3.4ppts to 6.6% for FY18.

• We draw attention to Bonia’s corporate exercise to demerge and list its wholly-owned subsidiary, CRG Incorporated S/B (CRG) on the LEAP Market. Existing Bonia shareholders will receive CRG shares as dividend-in-specie. In return, the carved out value for Bonia would be adjusted to RM0.44/share in tandem with CRG’s contribution (~10%) to Bonia’s overall earnings. We think the exercise could be near-term negative as it involves shareholders owning less liquid CRG shares on the LEAP Market. Bonia looks to complete the exercise by end-3QCY18.

• We cut our earnings by 36%/32%/30% for FY18F-FY20F to reflective our new topline and margin assumptions. Key risks include accelerated operational cost, poor execution and softer-than-expected topline recovery.

Source: AmInvest Research - 31 May 2018