Bonia’s 1HFY19 core net profit of RM5.7m was above our expectations, accounting for 87% of our FY19E forecast. The surprise arose from better-than-expected operating margins following the group’s consolidation of several non-performing outlets and cost rationalisation exercise. Yet, operating conditions remained weak as sales continued to decline -10.4% yoy in 1HFY19 on a comparable basis. Maintain SELL with a revised TP of RM0.20, based on an unchanged 13x CY19E EPS.

Above Expectations

Without the MFRS 15 reclassification (refer to footnotes explanation on pg2), Bonia’s 1HFY19 sales was weaker at RM202.1m vs RM225.6m in 1HFY18 (-10.4% yoy). The underperformance in sales was recorded broadly across both the domestic and overseas markets. Operating margins also declined 1.5ppts yoy, which alongside higher taxation led to a 56.9% yoy decline in core net profit. However, 1HFY19 core earnings still tracked above our expectations (87% of full-year forecast), which we gather is due to less-than-expected margin contraction yoy as our FY19E revenue projection was deemed to be in-line.

Sequentially Stronger Due to Year-end Sales Period

2QFY19 results were sequentially much stronger owing to seasonally higher festive period sales (+33.1% qoq) amid the year-end sales campaign which lasted from Nov-Dec 2018. However, 2QFY19 revenue was still lower by 7.8% yoy vs. 2QFY18, while operating margins were also lower by 2.1ppts yoy. The group’s operations has continued to suffer from a weaker retail environment while competition remains intensified, owing to the presence of numerous fashion retailers in the market, including that of e-commerce and omnichannel players which grow from strength-tostrength each year. Thus, we still expect Bonia to incur elevated A&P expenses in order to consolidate its brand equity.

Maintain Sell With Adjusted TP of RM0.21

We raise FY19-20E EPS estimates by 39%/9% respectively after imputing better-than-expected rationalisation of operating costs. Nonetheless, we remain cautious on Bonia, which continues to face difficult operating conditions. Hence we maintain our SELL call on the stock, albeit with a revised TP of RM0.20 (from RM0.17) based on an unchanged PER pegged to 13x CY19E EPS. Upside risks include better-than-expected sales and lower than expected operating costs.

Source: Affin Hwang Research - 1 Mar 2019