We remain cautious on Bonia’s prospects as we believe that nearterm outlook remains highly challenging for the company, which will continue to be weighed down by stiff competition and high expenditures. Maintain SELL on Bonia with a lower TP of RM0.17, with the view that the company’s earnings may be on a downward trend in the next 6 to 9 months, before gradually turning around.

Weaker Performance Seen Across Brands, as Well as Geographically

To recap, Bonia recorded a disappointing 1QFY19 start to the year, with core net profit declining 64% yoy due to declining sales across brands in both the local market (-8% yoy) as well as its overseas market (-20% yoy), consequently compressing margins against a high operating leverage. It also fared worse sequentially, highlighting that the GST-free holiday was not a boon for the retailer, but rather went towards large-ticket purchases. SSSG continued to decline yoy across the board, save for its consignment counters which have underwent a heavy rationalisation exercise.

Shift in Strategy Amidst a Challenging Backdrop for Fashion Retailers

For its external brands, management intends to further capitalise on the its highly-profitable Braun Buffel leatherwear brand by expanding across new markets, while scaling back on its loss-making licensed apparel brands which are getting edged out by larger players with better scale. On the other hand, management is maintaining efforts to build up its in-house core brands, ‘Bonia’ and ‘Sembonia’ through a revamp in their sales approach.

FY19E Earnings Projected to Further Decline

As part of management’s plan to boost Bonia’s market positioning, the group is expected to incur further advertising and promotional expenditure and will continue to have high capex commitments, hence a damper to its near-term earnings. While a meaningful turnaround in sales from the shift in marketing strategy may take least 6-9 months, we expect the negative SSSG trend to persist over in FY19E and the first quarter of FY20E. Competition from budding entrants and established international players (online and omnichannel retailers in particular) will also remain stiff.

Maintain SELL With a Lower TP of RM0.17 From RM0.21

We remain cautious on Bonia’s prospects, as near-term earnings outlook appear muted. We cut FY20-21E earnings by 16-22% on account of higher recurring A&P expenditure and subsequently reiterate our SELL call, with a revised TP of RM0.17 (from RM0.21) based on a 13x P/E target on CY19E EPS. Upside risks include better-than-expected recovery in sales, and lower-than-expected operating expenditure.

Source: Affin Hwang Research - 20 Dec 2018