Bonia’s 1Q18 started off weak with core net earnings of RM2.3m (- 50.4% yoy), accounting for 7% and 6% of ours and consensus’ fullyear estimates. Results were below expectations due to lower revenue coupled with higher operating expenses. While Bonia registered negative SSSG across all markets, we expect better product mix and rationalization of non-performing stores to help improve bottom line. Maintain Hold with unchanged TP of RM0.55.

1Q18 Net Earnings Below Expectations

1Q18 revenue declined by 13.3% to RM118.9m mainly due to an early Hari Raya which shifted some sales to 4Q17. Its gross margin improved to 2.1ppts to 60.5% as a result of its pricing strategy that introduces highermargin products, reduces discounts, and adjusts prices for new product ranges. However, the opex was slightly higher due to increased selling and distribution expenses for Braun Buffel’s 130 years celebration in Singapore. 1Q17 recorded exceptional items of a gain on disposal of property and unrealised gains in forex, amounting to RM4.1m. Hence, the net profit and core net profit declined by 84% yoy and 50.4% yoy to RM1.3m and RM2.3m respectively and thus result below expectations.

Weak Sales Across All Markets

During the quarter, the company continued to shut down non-performing stores. The number of consignment counter and boutique outlets have declined 94 qoq and 4 qoq to 890 and 184 respectively, contributing to lower sales. This is consistent with the Group’s effort in rationalising and cost control to improve profitability per store. Nevertheless, Bonia registered SSSG of -18% for Malaysia, -1% for SG, -26% for Indonesia, - 1% for Vietnam, signalling weakness in the retail sector. The weakness was also partially due to absence of the Hari Raya festive season sales that affect the sales in Malaysia and Indonesia market.

Maintain Hold and TP of RM0.55

We maintain our earnings forecast unchanged as the disappointment in 1Q18 was mainly due to poorer-than-expected top line sales and slightly higher selling and distribution expenses. While Bonia’s sales may continue to be dragged down by weak consumer sentiments, we have assumed higher EBIT margins underpinned by efforts to improve product mix and rationalise non-performing stores. Maintain HOLD with an unchanged TP of RM0.55 based on 12x PE (5-year mean PE). Key risks include better/weaker-than-expected consumer sentiment and higher/lower cost of goods sold.

Source: Affin Hwang Research - 30 Nov 2017