Slow start to FY17

Stripping off the gain of disposal of a property, Bonia’s 1Q17 core net earnings of RM 4.6m came below our and consensus expectations. We see that the 1Q17 gross profit margin improved by 4ppts to 58.4% from a low base last year and probably due to the Group’s efforts in cost control. We decrease FY16-18E earnings by 13-21% and maintain a SELL at a higher TP of RM0.49.

1Q17 net earnings in line but core earnings below expectations

Bonia reported weak sales of RM 137m (-17% yoy) due to weak consumer sentiment while net earnings fell by 9% yoy to RM 8.1m. This is in line with our and consensus expectations accounting for 23% and 24% of full-year forecasts. Stripping off the gain of disposal of a property amounting to RM 2.99m and other exceptional items, core net earnings decreased by 58% yoy to RM 4.6m which is below expectations at 13% of forecasts. In this quarter, Bonia showed negative same store sales growth (SSSG) across all regions; Malaysia (-16%yoy), Singapore (-7%yoy), Vietnam (-17%yoy) and Indonesia (-8%yoy), the latter which has constantly seen positive SSSG until this quarter.

1Q17 sees margin improvement

Recall that we saw the FY16 gross margin and EBIT margin contract by 4.1 ppts and 3.4 ppts yoy to 55.0% and 8.6% respectively due to the increase in promotional activities and higher discounts to attract customers as well as the increase in imported merchandise costs due to the weakened Ringgit and absorption of the 6% goods and services tax (GST). In 1Q17, we see that gross margin is at 58.4%, up 4ppts yoy and EBIT margin improved by 0.7 ppts yoy to 9.4%. This improvement is consistent with what we have assumed due to the Group’s efforts in rationalisation and cost control. Hence, we forecast GP margins to recover to 56.5% in FY17E from 55% in FY16.

Maintain SELL with higher TP of RM0.49

Nonetheless, we decrease earnings by 13-21% for FY17-19E, mainly assuming lower growth in revenue as consumer sentiment remains weak for consumer discretionary products. We maintain our SELL rating on the stock with a higher TP of RM 0.49 from RM 0.47 as we roll forward to FY17E based on an unchanged 12x PE (which is in line with its 5-year average PE). Key upside risks include better-than-expected consumer sentiment and lower cost of goods sold.

Source: Affin Hwang Research - 29 Nov 2016