-  We reaffirm our BUY recommendation on Bonia Corporation (BON) with a higher fair value of RM5.40/share (vs.

RM4.50/share previously), pegged to a higher 15x PE over CY14F earnings – at a premium to Padini Holdings’ (HOLD, FV: RM1.80/share) implied target PE of 12x.

- Admittedly, we had been a tad conservative but following a meeting with management, we have raised our PE multiple given greater clarity on the group’s growth strategy.

- BON’s level of institutional funds has risen to 40%, including long-term private equity fund, Credo Group, which holds 7%, vs. 36% institutional holdings for Padini.

- We expect institutionalisation to expand further, underpinned by its robust earnings trajectory and broadening geographical presence. BON’s 3-year EPS CAGR is estimated at 35% vs. 10% for Padini.

- BON appears to be in a monopolistic position in its operating market of leather products. We see Padini facing stiff competition from the likes of Uniqlo and H&M in the mid-market apparel segment.

- BON’s competitors are international premium brands, i.e. Furla and Coach, whose products are priced 40%-50% higher than those under BON’s premium brands (Bonia and Braun Buffel).

- Its strong SSSG momentum should continue. In the same operating market (Malaysia), BON achieved a positive SSSG of +6%, vs. Padini’s which is in negative territory (concept store: -0.3% and single brand store: -4%) in their recent 1HFY14 results. To further underscore BON’s growing SSSG, we are encouraged by the manufacturing capacity expansion (+50% capacity) at its 3rd factory in Malacca.

- Management has a more guarded approach towards overseas expansion to cushion gestation losses. Malaysia,

Singapore, Vietnam, and Indonesia remain as key markets. More importantly, it is constantly eyeing new markets within

Asia. Cornerstone brands for overseas growth are its inhouse brands – Bonia, Sembonia and Carlo Rino – and the co-owned brand, Braun Buffel.

- We understand that BON may spin off one of its business units. In our view, such a move would help unlock value and lift the latter’s’ profile.

- At the current level, the stock is trading at a PE of 12x FY15F and 0.4x PEG – at a discount to Padini’s 13x PE and the sector average of 18x. Valuations are attractive as BON is one of the cheapest consumer stocks in Malaysia with robust earnings potential and strong brand visibility.

Source: AmeSecurities