Bonia’s 1QFY19 core net profit of RM1.2m disappointed, accounting for only 4% of our previous full-year forecast. On a comparable basis, revenue declined by 14% yoy despite the occurrence of the zero-rated GST period domestically. We turn more cautious on Bonia’s turnaround prospects and downgrade our call to SELL (from Hold) with a lower TP of RM0.21 (from RM0.44).

Sales Continued to Disappoint; Tax-holiday Did Not Provide a Boost

Stripping out the effects of MFRS 15 reclassification, Bonia recorded weaker revenue of RM86.7m (headline: RM99.2m), which declined 13.6% on a yoy basis. The drop in revenue is attributed to a weak showing across both the domestic and overseas markets. The occurrence of the zero-rated GST period during the quarter did not seem to benefit Bonia meaningfully as Malaysian retail sales declined by 8% on a yoy basis, which was also impacted by the closure of nonperforming outlets. The overseas market posted a sharper decline of 20% yoy, mainly due to a drop in sales in Indonesia and other markets such as Kuwait, Cambodia and Myanmar.

Likewise Decline in Margins, 1QFY19 Earnings Disappoint

Due to operating leverage which is the nature of fashion retail, a decline in revenue entails a sharper decline in net profit due to shrinking margins. This was seen in the decline in its pretax margin, which declined by 1.6ppt yoy and 2.9ppt qoq. The operating profit improvement for the Malaysian retail operations was offset by the overseas markets which dipped into operating losses. Due to this, 1QFY19 core earnings disappointed significantly at RM1.2m, which made up only c. 4% of our previous full-year forecast.

Turnaround Still Not Evident

We turn more cautious on Bonia’s turnaround prospects especially in the near term as Bonia is competing in a highly competitive space with many established international players. In the meantime, cost pressures might persist as Bonia continuously spends on advertising and promotions to build brand equity. As we believe the gestation period might take longer than expected, we have cut our FY19-21E EPS forecast by 78-27%.

Downgrade to Sell With Adjusted TP of RM0.21

After cutting our earnings forecasts, we downgrade Bonia to a SELL, with a lower TP of RM0.21 based on a PER of 13x CY19E EPS (-1SD below 5- year mean; previously 12x FY19E). Upside risks include a better-thanexpected recovery in sales and lower-than-expected operating costs.

Source: Affin Hwang Research - 30 Nov 2018