We are initiating coverage on Asia Brands Bhd (“ASIABRN” or formerly known as Hing Yiap Group Bhd) with an OUTPERFORM rating and a Target Price of RM4.00 based on 8.5x FY14E PER. We  believe this under-researched retail play is ripe for a re-rating as its earnings profile is now at an inflexion point post the completion of its acquisition of the Anakku and Audrey brands, which have the largest market share in the baby apparel (29%) and lingerie (16%) markets respectively. The acquisition also came with a wider distribution network that its existing brands (e.g. BUM Equipment, DIESEL, Antioni, Bontton and Unionbay) can tap on.  These new brands tend to be more defensive and less discretionary, which gives the company a more resilient demand visibility while allowing it to tap the Malaysia’s burgeoning middle-income earners market. The result is a more exciting top line growth and a change in the overall group’s strategy towards an asset-light model. We estimate FY14-15E  net profits to grow 117%-22% on the back of RM389.9m-RM443.4m in sales, which would be higher than Padini or Bonia’s earnings growth. Although listed comparables like the two companies above have larger market caps of RM1,316m-RM401m vs. ASIABRN’s RM226m, they only own a fragmented market share (<3%) within their own garment segments. As a result, we believe that ASIABRN’s Fwd PER will re-rate to 8.5x (from 6.7x currently) to narrow its gap with Padini and Bonia’s Fwd PERs of 12.1x and 8.2x respectively. 

Better earnings visibility. Previously with a negligible market share within the highly competitive fashion retail segment, ASIABRN  has now established itself to become a market leader within the baby apparel and  lingerie segments with its acquisition of two home-grown brands - Anakku and Audrey. We believe that the acquisition will bring about positive synergies via:  1) the market leaderships of Anakku and Audrey (29% and 16% market shares respectively) which suggest a more resilient demand prospect;  2)  better earnings visibility and  3)  a wider distribution network for greater economies of scale and brand awareness.       

As such, we expect the group’s earnings to be less seasonally volatile as half of the group’s revenue will now be driven by the Anakku brand, which is more defensive and less discretionary in nature. The acquisition of Audrey and Anakku also provides ASIABRN with an enlarged retail network of 189 outlets and more than 1,000 consignment counters, which would unlock its potential in tapping into a bigger share of Malaysia’s rising middle income group This would spark an expansion trail for its existing casual lifestyle segment into regional /neighbourhood malls.

Embracing the asset-light model. We also expect a better Cash Conversion Cycle (CCC) from 359 days to 138 days via the roll-out of its "Smart Vendor Partnership Programme" (SVPP) as the company moves away from its traditional consignment model, which requires the holding of large inventories. Together with the disposals of a few non-core assets, its new asset-light model will help ASIABRN to pare down approximately RM84.2m in debts arising from the acquisition. Note that the assetlight model will not only improve the cashflow of the company but it will also enhance the profitability of the group. For instance, interest savings will come up to c.2.6% of its PBT should its gearing be reduced by RM20m. 

Rerating on the cards. Notably, listed comparables like Padini and Bonia  own fragmented market shares in their own segments (<3%) and are trading at 12.1x-8.2x Fwd PERs. In addition, the earnings prospect of both Bonia and Padini could be affected by: (i) any cuts in subsidies and (ii) the implementation of the GST. While ASIABRN will be affected as well, the impact could be to a lesser extent as its baby and lingerie segments are less sensitive to economic cycles as opposed to the fashion segment. Besides, ASIABRN clearly has an advantage in terms of having a sizeable market share in its baby and lingerie segments. As such, we reckon that its valuation gap will narrow towards its bigger peers above. Its market cap will expand by 27% to RM286m if ASIABRN gets rerated up to 8.5x PER from the current 6.7x. Based on our FY14 net profit estimate of RM33.8m, our target price for ASIABRN is pegged at RM4.00.

Source: Kenanga