Period  3Q15/9M15

Actual vs. Expectations  9M15 core profit of 8m (-53% YoY) missed expectation, representing only 27% of our full-year forecast. No consensus numbers were available.

 The shortfall was mainly due to: (i) lower-than-expected revenue growth, (ii) higher-than-expected selling, distribution and administrative expenses, along with (iii) higher-than-expected finance cost.

Dividends  As expected, no dividends were declared.

Key Results Highlights

9M15 vs. 9M14, YoY  9M15 core earnings dipped 53% due to aggressive promotional and discounting activities where opex rose 14% while cost of sales accelerated by 10%. We reckon it was deliberated to defend market share amid rising competition in the retail space. Also, there was an effort to pare down its high level of inventories. Notably, sales posted a weak showing (+3%) as well.

3Q15 vs. 2Q15, QoQ  Despite being a period of festivities, revenue fell 16% on the back of weak consumer sentiment, stemming from bad weather especially in East Malaysia given the recent flooding. Gross profit margin was down 6ppts due to steep price discounts offered to reduce its high inventory levels. In turn, it registered a core loss of RM4m this quarter.

Outlook  We expect consumer sentiment to remain weak on the back of rising inflationary environment. As a result, this will negatively affect discretionary spending and cause revenue growth to taper.

 Also, competitive headwinds in the market are likely to exert pressure on profit margins as the company embarks on aggressive marketing and promotional activities in attempt to boost sales.

Change to Forecasts  Given the lacklustre 9M15 results, we cut our FY15E/FY16E earnings by 54%/55% to RM13m/RM16m from RM29m/RM35m. Essentially our new assumption takes into consideration of: (i) lower revenue, (ii) higher opex, and (iii) higher finance cost.

Rating Downgrade to UNDERPERFORM (from MARKET PERFORM). Considering negative headwinds surrounding the sector, ASIABRN’s outlook seems bleak. Hence, we decided to downgrade our rating on the stock.

Valuation  In tandem with the downward revision in earnings. We revise our TP to RM2.35 (from RM3.19) based on a simple average of 9.8x FY16E PE and 0.82x FY16 P/B (previously 8.8x FY15E PE). Basically, we employed a new valuation methodology to reflect the steep revision to its earnings, rending standalone PE valuation too conservative. Note that the multiples used above are 5- year historical forward average.

Risks to Our Call  Faster-than-expected recovery in consumer sentiment.  Lower-than-expected opex. 

Source: Kenanga