Still Suffering From Weak Sales

Stripping off the gain on PPE and other exceptional items, Bonia’s 9M17 core net earnings of RM20.5m (-1.8% yoy) came in below our and consensus expectations. While the EBIT margin improved due to the Group’s efforts in closing down non-performing stores, reducing discounts and introducing higher-margin products, the main culprit was the weak top line sales. We cut our FY17-19 EPS forecasts by 16- 19% on lower revenue growth assumptions. Maintain SELL at TP of RM0.50 after rolling forward to CY18.

9M17 Core Net Earnings Below Our and Consensus Expectations

Bonia reported a 9.1% yoy decrease in 9M17 revenue to RM459.8m, while net profit increased by 15.7% yoy to RM24.1m as the Group embarked on a strategy to reduce discounts given out compared to last year and adjust prices for new product ranges, particularly for the Bonia and Braun Buffel brands. Stripping out exceptional items, mostly the gain on disposal of PPE of RM3.2m and foreign exchange gain of RM1.7m, core net earnings decreased by 1.8% yoy to RM20.5m, below our and consensus expectations, and accounting for 63% and 61% of the respective full-year forecasts.

Still Not Out of the Woods

In this quarter, Bonia still showed negative same store sales growth (SSSG) across all regions; Malaysia (-11% yoy), Singapore (-7% yoy), Vietnam (-25% yoy) and Indonesia (-8% yoy, having had positive SSSG until 1Q17). The company is closing down non-performing boutiques and consignment counters, in particular for licenced brands. The total number of outlets has declined to 1,233 in 3Q17 vs 1,439 at end-FY16, which also explains why 9M17 revenue declined by 9.1%. However, the Group’s efforts in rationalisation and cost control resulted in margin improvement. The better product mix has boosted 9M17 gross margin to 58% compared to 55% in 9M16 while better control of operating costs has helped improve the EBIT margin by 1.7ppts.

Maintain SELL With Revised TP of RM0.50

We revise our FY17-19E forecasts downwards by 16-19%, in assuming a 9.5% yoy fall in revenue for FY17E and lower revenue growth for FY18- 19E. We maintain a SELL on the stock with a slightly higher TP of RM0.50 (from RM0.49) based on an unchanged 12x PE (which is in line with its 5- year average PE) as we roll forward to CY18. While the Group intends to focus on higher-margin limited edition products, we believe the top line will remain muted as demand for consumer discretionary products may be affected in times of weak consumer sentiment. Key upside risks include better-than-expected consumer sentiment and lower cost of goods sold.

Source: Affin Hwang Research - 26 May 2017