- We initiate coverage on Bonia Corporation (BON) with a BUY rating and a fair value of RM4.50/share pegged to a PE of 10x of CY15F earnings – a discount to Padini Holdings’ implied target PE of 13x, in view of the BON’s more robust earnings prospect.

- BON is an established retailer (164 boutiques and 1,027 counters) of well-accepted in-house brands of leather goods, catering largely to the growing upper mid-end market. The group also co-owns the worldwide Braun Buffel trademark, which specialises in leather accessories for men and ladies.

- Having laid low in recent years to focus on improving operational efficiency, management has now put in place a concrete strategy to accelerate growth trajectory and embrace better corporate access. The strong 1HFY14 net profit (+44% YoY) is just the start, with growth coming from rising sales and margin expansion.

- Management will be selective in opening new boutiques. The focus would be on building brand recognition and expanding product line. This is coupled with more boutique openings in Asia markets with high growth, namely, Indonesia (currently: 8 boutiques), and store refurbishments.

- Beyond its flagship Bonia brand, the group is looking to accelerate its growth potential through Braun Buffel (20% of revenue), notably within the Asia Pacific region. We see solid growth prospects for Braun Buffel given the healthy margins and worldwide brand recognition. A new product line will be launched soon.

- BON would step up the implementation of a new incentive structure, called the dealership partnership programme, to drive sales at boutiques and move away from fixed compensation. Growth will also be underpinned by the ramp-up of exports. BON is in negotiations with established potential partners to enter new markets within Asia through exports for selective brands.

- Balance sheet is healthy with a net gearing of 18% as at end-1HFY14 and annual budgeted capex of RM30mil. While BON has no official dividend policy, it has a consistently paid out dividends of at least 24% of earnings for FY10-FY13. We project an unchanged dividend payout ratio.

- We forecast earnings to rise by 53% from RM63mil in FY14F to RM82mil in FY15F, and by another 22% to RM101mil in FY16F. BON is still under-researched. However, we expect strong earnings deliverance and improved corporate access to trigger a broadening of analysts’ coverage. This should promote share price discovery to fair value.

- Valuation is undemanding given the significant earnings expansion, with a robust 3-year CAGR of 35%. At the current level, the stock is trading at an attractive FY15F PE of 9x and PEG of 0.3x.

Source: AmeSecurities