We maintain our cautious stance on Bonia as the road ahead remains challenging, in our view. While we acknowledge that margins have improved in recent quarters owing to its ongoing store rationalisation process, the sales momentum remains lackluster. We cut our earnings estimates by 4-10% over FY20-22E, largely to account for weaker consumption spending and a more competitive fashion retailing landscape. Post-revision, we downgrade Bonia to SELL with a lower TP of RM0.84. This note marks a transfer of analyst coverage.

Cautious Spending Weighed on Sales Momentum

Bonia’s revenue declined for a fourth consecutive year in FY19. For 1QFY20, revenue further dipped by 5.1% yoy to RM94.1m attributed to the ongoing process of non-performing store closures on top of weaker retail spending.

Headwinds Remain Moving Forward

Moving forward, we expect the top-line to remain under pressure as the sales momentum is likely to be subdued in times of weaker consumer sentiment, exacerbated by the proliferation of online e-commerce portals. We understand Bonia also faces stiff pricing and market-share pressure from key competitors such as Michael Kors and Coach which run frequent discounts on their merchandise.

Further Store Closures Likely Still on the Cards

As part of the group’s store rationalisation initiative, FY19 saw closures of 60 boutique stores and 249 consignment counters. We gather that further store closures are likely still on the cards for FY20 (particularly for the Sembonia brand), albeit on a smaller scale compared to FY19.

Downgrade to SELL

We cut our earnings estimates for FY20-22E by 4-10%, broadly taking into account: i) weaker consumer spending, ii) proliferation of e-commerce platforms and iii) slightly higher A&P spending going forward. Postrevision, we lower our TP to RM0.84, based on a lower target PER of 9x (2SD below 3-year mean; revised from 10.5x) on the CY20E EPS. All in, we are concerned that the ongoing restructuring and A&P measures may be futile in sustaining its brand appeal amidst a challenging retail landscape. Hence, we downgrade Bonia to a SELL (from HOLD).

Source: Affin Hwang Research - 31 Jan 2020