1H18 core net profit of RM15m (-8% yoy) was below our and consensus expectations as it only accounted for 43% and 45% of full year estimates respectively. Revenue declined by 10% yoy due to negative SSSG across all markets and closure of non-performing outlets. Cost efficiency measures and better product mix should lift margins, but we expect earnings will likely be dragged by poor sales. Maintain HOLD but lower TP to RM0.49. (From RM0.55).

1H18 Net Earnings Below Expectations

2Q18 revenue declined by 6.7% to RM160.3m due to closure of certain non-performing counters. Although Malaysian operation’s revenue increased marginally by 2% on the back of Braun Buffel sales, sales in Singapore, Indonesia, and Vietnam recorded negative yoy growth of 11%, 43%, and 36% respectively due to weak consumer sentiment and decrease in royalty income in Singapore. A 0.4ppts yoy improvement in gross margin to 58.1% and 9% yoy decline in operating expenses helped buffer the sales weakness, resulting in a PBT of RM21.3m (+5%yoy). Overall, 1H18 core net profit of RM14.8m (-8% yoy) was below expectations, accounting for 43% and 45% of full year estimates.

Weak Sales Persisted Across All Markets

In 2Q18, the company continued to shut down non-performing stores. The number of consignment counter was 897 vs. 1067 in 2Q17, which contributed to lower sales. This is consistent with the Group’s effort in rationalising and cost control to improve profitability per store. In line with Group strategy to grow own brands, the company’s boutique outlets increased from 184 in 1Q18 to 192 in 2Q18. Nevertheless, Bonia registered SSSG of -2% for Malaysia, -8% for SG, -30% for Indonesia, and -46% for Vietnam, signalling challenging outlook in the retail sector.

Maintain Hold and But Reduce TP to RM0.49

We reduce our earnings forecast for FY18-20E by 10-14% after cutting the revenue by c.8%. While we like company’s effort to improve product mix and reduce opex through rationalization of non-performing stores, Bonia’s sales across all key markets continue to be dragged by weak consumer sentiments. We expect Bonia’s sales in FY18 continues to be affected by closure of non-performing stores and weak sales arising from competitions and e-commerce. Maintain HOLD, but we reduce TP from RM0.55 to RM0.49 based on unchanged 12x CY2018E EPS (5-year mean PE). Key risks include better/weaker-than-expected consumer sentiment and higher/lower cost of goods sold.

Source: Affin Hwang Research - 28 Feb 2018