Bonia’s FY17 core net earnings of RM34m came in above our and consensus expectations of RM28m and RM30m respectively. While revenue declined by 8% due to store closures and negative SSSG across key markets, better gross profit margin and rationalization of non-performing stores helped to improve bottom line. Upgrade Bonia to HOLD with a TP of RM 0.55 (from RM0.50) as we expect better product mix and higher profitability per store to offset weak sales.

FY17 Net Earnings Above Expectation Due to Better Margin

Bonia’s FY17 of revenue declined 7.9% yoy to RM613.2m, but core net profit increased 13.8% yoy to RM33.9m as the Group adjusted its pricing strategy to introduce higher-margin products, reduce discounts given out and adjust prices for new product ranges, particularly for the Bonia and Braun Buffel brands. As a result, gross margin improved by 3.6ppts yoy to 58.6% in FY17. Operating expenses also decreased 5% yoy, attributable to the Group’s consolidation and rationalisation process by closing down nonperforming boutiques and consignment counters, especially for licensed brands. Stripping out exceptional items, core net earnings increased by 13.8% yoy to RM33.9m, above our and consensus expectations, and accounting for 120% and 113% of the respective full-year forecasts.

No Meaningful Recovery in Sales Yet

FY17 revenue declined by 7.9% yoy, partly because the company shut down non-performing stores. There were 188 boutique outlets which carry mostly in house brands such as Bonia, Carlo RIno, Sembonia, and Braun Buffel as at end FY17(FY16: 185). However, the number of consignment counters, in particular non-performing licensed brands, were cut from 1,254 to 984. In 4Q17, Bonia showed SSSG of 2% for Malaysia, 0% for Singapore, -6% for Indonesia and -9% for Vietnam, signalling weakness in the retail sector. On a full year basis, all key markets reported negative SSSG, ranging from -4% for Singapore to -19% for Vietnam.

Upgrade to HOLD With Revised TP of RM0.53

We raise our FY18-19E forecasts by 7-10%, assuming higher EBIT margins underpinned by efforts to improve product mix and rationalise nonperforming stores. Upgrade to HOLD with a slightly higher TP of RM0.55 based on an unchanged 12x PE (5-year mean PE). While the Group intends to focus on higher-margin products, we believe that top line will remain muted on weak demand for consumer discretionary products. Key risks include better/weaker-than-expected consumer sentiment and higher/lower cost of goods sold.

Source: Affin Hwang Research - 5 Sept 2017