Bonia’s 9MFY18 core net profit of RM16.3m (-11% yoy) was below our and consensus expectations (46% and 53% respectively. Revenue declined by 15.6% yoy due to continuous underperformance across all markets and closure of non-performing outlets. Improvements from cost efficiency measures and store rationalization efforts are still ongoing, and sales might see a pick up in the near term. Maintain HOLD with a lower TP to RM0.43.

9MFY18 Net Earnings Below Expectations

9MFY18 revenue declined by 15.6% yoy to RM329.8 mainly due to the closure of some non-performing boutiques and consignment counters. In Malaysia, certain underperforming licensed brands under the Group’s portfolio also exited from the local market. For the overseas market, Singapore and Indonesia operations also saw a decrease in sales, while exports to ASEAN and Middle East countries also took a hit, declining by 27.3% yoy. This contributed to the decline in core net profit, which came in at RM16.3m (-11% yoy) tracking behind our and consensus estimates.

Store Rationalization Continues

During the quarter, the company continued to shut down non-performing stores. The number of consignment counters have declined from 897 to 858 while the number of boutique outlets have declined by 192 to 185. While this is part of Bonia’s ongoing strategy to improve profitability per store, SSSG numbers were still lacklustre (+0% for Malaysia, -8% for Singapore, -28% for Indonesia and –20% for Vietnam), which shows the weak consumer sentiments. Nonetheless, Malaysian sales during 4QFY18 could be boosted by the Hari Raya festive season and the zerorisation of GST starting June 1st.

Maintain HOLD But Reduce TP to RM0.43

We reduce our earnings forecast for FY18-20E by 11-15% to reflect the demerger of CRG Group and a decrease in number of consignment stores. While we like the 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, competition and e-commerce. However, we do not discount the possibility of a pickup in consumer sentiments in the near future. Maintain HOLD, but we reduce TP from RM0.49 to RM0.43 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. This note marks a transfer of analyst coverage.

Source: Affin Hwang Research - 31 May 2018