Lower Operational Costs Boost Earnings

Bonia’s 1QFY20 core net profit beat our and market expectations, accounting for 29% and 28% of the respective forecasts. The variance was partly due to lower-than-expected operational costs. In light of the results, we raised our FY20-21 EPS forecasts by 3-20% to account for likely better opex savings. Moving forward, however, the outlook for the fashion retail business is likely to remain challenging. Hence, we lowered our CY20E PER target to 10.5x (from 13x previously) based on 1SD below its 3-year mean PER for a lower 12-month TP of RM0.26, but maintain our HOLD recommendation.

Opex Savings Boosted Earnings, Above Expectations

Bonia posted a lower revenue of RM94.1m (-5.1% yoy) for 1QFY20, attributed to the ongoing process of non-performing store closures on top of weaker retail spending. The EBIT margin jumped 5.2ppt to 8.9%, however, given the opex reduction, in particular staff costs, driven by the aforementioned store closures. In tandem with the margin improvement, core earnings came in above expectations at RM4.9m (>100% yoy). This accounts for 29% and 28% of our and the street’s forecasts with the variance to ours largely due to lower-than-expected operational costs.

Sequentially Weaker Post Festive Spending

On a qoq basis, both revenue and core net profit slumped by 17.3% and 39.2% as spending fell post the Hari Raya festive sales in the preceding quarter. Moving forward, the group is expected to realise further cost savings through store rationalisation exercises. However, the top line is likely to remain pressured against the backdrop of the overall subdued consumer sentiment coupled with intensifying competition in the fashion retail space.

Maintain HOLD With a Revised TP of RM0.26

In view of the results, we raised our FY20-21 earnings forecasts by 3-20% mainly to incorporate savings in opex resulting from the rationalisation of non-performing outlets. But, we lower our CY20E PER target to 10.5x (from 13x previously), now based on 1SD below the 3-year mean (5-year mean previously), to better reflect the increasingly competitive fashion retail landscape moving forward. Our new TP is revised lower to RM0.26. Given the limited upside, we reiterate our HOLD rating. 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 - 2 Dec 2019