Bonia’s FY19 results exceeded the street and our expectations, accounting for 127% and 126% of full-year forecasts respectively. The surprise was mainly due to lower-than-expected tax expense and MI in 4QFY19, which however also recorded a steeper sales decline. Consequently, we maintain our cautious stance on Bonia’s prospects amid a fierce competitive environment seen in fashion retail, despite management’s prudent cost control measures. However, we upgrade the stock to a HOLD (from Buy) over the recent stock price retracement, with an unchanged TP of RM0.28.

Above Expectations

Without the MFRS 15 reclassification, FY19 revenue shrunk 8.4% yoy to RM403m, attributed to weak SSSG and closures of non-performing outlets as part of its cost rationalisation exercise. EBIT margins however improved slightly yoy owing to the latter, which gave rise to c.7% reduction in opex, in particular from lower staff costs. Yet, a higher effective tax rate of 40% was recorded for the year, which led to a fall in core net profit of 24.9% yoy to RM17.7m. Aside from the lower-than-expected taxes and MI share of profits, the results largely met our forecasts from the core PBT level.

Sales Recovery Remains the Key Concern

4QFY19 revenue (pre-MFRS 15) recorded a sharper fall of 10% yoy, which drifted from the arrest in sales decline seen over 2Q (-8% yoy) and 3QFY19 (-2% yoy). Going into FY20, we expect management to realise further cost savings which will in turn allow for a stronger A&P drive in order to turn around its sales performance. Nevertheless, we foresee the negative SSSG trend to persist over 6MFY20, with any fruitful endeavours by the management expected to take time to materialise.

Upgrade to HOLD on Valuation Grounds

We fine-tune FY20-21E EPS while introducing our FY22E forecasts at the same time. All in, we believe Bonia’s outlook remains muted, amid unabating competition in the fashion retail market. Post-earnings revision, our 12-month TP of RM0.28 is maintained, based on an unchanged 13x CY20E PER target. However, we now upgrade the stock to a HOLD (from SELL) as the share price is trading close to our fair valuation. Upside/downside risks: (i) improvement/deterioration in SSSG; (ii) uptick/decline in consumer spending; and (iii) lower/higher than expected operating costs.

Source: Affin Hwang Research - 30 Aug 2019