Recently we met up with Asia Brands Bhd (ASIABRN)’s management and came away feeling cautiously optimistic regarding the company’s prospects. This year, the company’s focus is to pare down gearing further and strengthen the balance sheet. We are positive on the move, as this would translate to lower interest expenses, higher profitability and a possible higher dividend payout over a longer-term period. While ASIABRN would continue to look out for more opportunities in terms of brand portfolio and outlets expansion, they are also planning to tag along AEON for its expansion plan moving forward. After the meeting, we decided to lower our FY15 core NP forecast by 20.3% to RM30.5m, to rationalise our previous over aggressive growth assumptions. Nevertheless, given its strong retail branding and excellent growth prospects, a prospective FY15 PER of 8.5x appears to be undemanding vis-à-vis the retail sector average of 13.0x and the FBM Small Cap index of 12.5x fwd. PER. We currently value ASIABRN at RM4.05/share, based on FY15 10.5x PER. The MARKET PERFORM rating is maintained, as we think that most of the earnings prospect has been priced in and there is still a lack of immediate catalyst.

Recap on FY14 performance. Last year, ASIABRN was busy streamlining its business model (following the acquisition of the Asia Brands Corporation Bhd subsidiaries – baby brands such as Anakku and lingerie brands Audrey in Dec 2012) and disposed off all its non-revenue generating fixed assets. The manufacturing function has been outsourced to reliable partners, and ASIABRN is now focused solely on brand management. With its transformative business model, ASIABRN’s revenue and PBT grew by 69.7% and 78.4% YoY, respectively. Group EBIT margin also improved by 1.6ppt to 16.1%.

To strengthen its balance sheet this year. As at FY14, the group’s cash position stood at RM10.3m with total borrowings of RM177.6m. This implies a net gearing ratio of 0.7x (compared to 1.2x post Anakku and Audrey acquisition). Moving into FY15, we understand that the management will continue to pare down the Group's gearing further through cash generative business model. Based on our estimates, the company would be able to bring down an extra c.RM50m of debt this year. That said, ASIABRN would be able to reduce an extra RM2.75m in interest expenses this year.

Strategic partnership with AEON. ASIABRN is planning to tag along AEON for its aggressive expansion plan moving forward. More consignment outlets will be opened in Aeon Malls. We are positive on this latest move, as this strategy would be able to keep its overhead expenses low while unleashing more cash and profitability.

New set of FY15-16 earnings forecasts. While we are positive on ASIABRN’s continued expansion strategy, we have decided to rationalise our previous over aggressive revenue growth assumption (from +23.4% YoY to +10.4% YoY). Outlets expansion may not be as aggressive as previously anticipated, in view of a more challenging operating environment and cautious consumer sentiment ahead of implementation of GST. With this, coupled with a higher operating expenses assumption, we lowered our FY15 core NP forecast by 20.3% to RM30.5m (+25.6% YoY core NP growth). At the same time, we introduce the FY16 estimates with net profit expected to grow at 20.6% YoY. Dividends are expected at 5 sen/share for the next two years, as the company requires more cash for its upcoming expansion plans. However, we believe that the company might look to increase their dividend payout should they managed to strengthen up their balance sheet in the next two years. At the current dividend payout, this implies a net dividend yield of 1.3%.

TP lowered to RM4.05/share. Given its strong retail branding and excellent earnings growth prospect, we believe a prospective FY15 PER of 8.5x appears to be undemanding vis-à-vis the retail sector average of 13.0x and the FBM Small Cap index of 12.5x fwd. PER. In our view, ASIABRN should at least trade closer to the FBMSC’s valuation; however we choose not to be over aggressive for now due to: (i) cautious consumer spending outlook in the overall consumer sector, (ii) its relatively high gearing ratio compared to the other retailers which normally have a net cash position. Thus, we are now valuing ASIABRN at FY15 10.5x PER (from 8.5x PER), implying a price target of RM4.05/share (from RM4.10/share). MARKET PERFORM rating maintained, as we think that most of the earnings prospect has been priced in and there is still lack of immediate catalyst for the company.

Source: Kenanga