Post our meeting with management, we continue to see tough times ahead for Bonia. While its recent earnings decline was lessened by management’s cost-reduction initiatives, weak sales momentum remains a key concern for the company. We tweak our EPS estimates to reflect improved margins as well as lower taxation rates. However, we maintain our SELL recommendation given Bonia’s challenging prospects, albeit with a revised TP of RM0.28 (from RM0.25).

Regaining Footing Through Cost Rationalisation

To recap, Bonia has suffered from multiple consecutive quarters of sales declines, as business conditions became more challenging after the GST’s implementation as well as the heightened competition in the retail market. Despite that, core earnings recovered for the group in 3QFY19, arising from margin improvements after various cost-cutting measures undertaken including consolidation of outlets and staff expenditure.

Consolidation Phase Seen Coming to Its Tail-end

We understand that net closures of outlets, particularly for consignment counters, have been largely completed following Bonia’s three-year consolidation and realignment phase undertaken since FY17. Following on, the group is looking to increase net openings of boutique stores and counters in FY20, accompanied by higher A&P to raise its brand presence.

SSSG Has Yet to Recover However

The negative SSSG trend has persisted in 9MFY19, with only its Braun Buffel outlets recording positive momentum. We believe an organic sales recovery might not transpire at least until 2HFY20, given the lack of encouraging signs observed thus far. Because of that, we foresee earnings at the PBT level to be largely flattish in FY20. However, we gather that the elevated taxation issue related to an alleged VAT shortfall at its Indonesian operations should be resolved, giving rise to core PAT growth next year.

Maintain SELL

Ultimately, we are still cautious on the group’s prospects, owing to its unexciting sales performance amid heightened competition in fashion retail. We raise our FY20-21E EPS estimates by 24%/5% mainly on margin improvement and normalising tax rates. We reiterate our SELL call with a higher TP of RM0.28 based on an unchanged 13x PER target on CY20E EPS. Upside risks include better-than-expected recovery in sales, and lower-than-expected operating expenditure.

Source: Affin Hwang Research - 17 Jul 2019