Period

FY15

Actual vs. Expectations

Even after removing one-time items like: (i) gain on disposal of subsidiary (RM6.5m), (ii) inventory write-offs (-RM3.2m), (iii) bad debt write-offs (-RM6.6m), and (iv) impairment on receivables (-RM0.3m), ASIABRN’s FY15 core profit of RM5.2m (-74% YoY) still missed expectations, making up only 40% of our forecast. Consensus numbers were unavailable.

The deficit was mainly due to higher-than-expected selling, distribution and administrative expenses.

Dividends

As expected, no dividends were declared.

Key Results Highlights

FY15 vs. FY14, YoY

FY15 core earnings fell 74% due to aggressive promotional and discounting activities where both opex and cost of sales spiked up 17%. Notably, sales were also tepid (+4%). 4Q15 vs. 4Q14, YoY

Core profit declined more than 100% due to the same reasons above. 4Q15 vs. 3Q15, QoQ

Sales nudged up 7% causing core loss to narrow by 34%. This was due to a low base effect.

In sum, the move to be aggressive on promotional and discounting activities was to defend market share amid rising competition in the retail space. Furthermore, it was an effort to pare down its high level of inventories.

Outlook

GST implementation is expected to dampen consumer sentiment and haul down discretionary spending for the next 2-3 quarters.

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

Change to Forecasts

Post updating the full set of FY15 financial results into our model, we made some housekeeping adjustments. Our FY16E core profit was revised down by 31% to RM11m from RM16m, after factoring in higher opex as well. Furthermore, we have also introduced our FY17 forecasts, where we expect earnings to grow 21% to RM13m – high growth is due to a low base effect.

Rating

Maintain UNDERPERFORM

Valuation

In tandem with the downward revision in earnings, we revise our TP to RM1.97 (from RM2.35) based on a simple average of 9.8x FY16 PE and 0.82x FY16 P/B (unchanged). Note that the multiples used above are 5- year forward averages.

Risks to Our Call

Faster-than-expected recovery in consumer sentiment.

Lower-than-expected opex.

Source: Kenanga Research - 1 Jun 2015