Recommending Trading Buy on YOCB with Fair Value of RM1.50 (18% upside) on FY17E PER of 10.5x. YOCB is a quality name with proven track record and dominant market share in the local bed linen industry. The establishment of more inhouse retail outlets and sustainable demand should propel earnings growth of 13% and 9% in the next two years. Vis-à-vis retail peers, valuation is attractive and investors should look to capitalize on the valuation gap.

Embedding sustainability. Established for more than five decades, Yoong Onn (YOCB) is a leading integrated designer, manufacturer, distributor and retailer of home linen and bedding accessories in the region. Since listing in 2009, YOCB has consistently maintained its profitability and grew its revenue by 6-year CAGR of 6.1% to achieve RM185.3m in FY15. Throughout the years, the company has showcased strength and expertise in the challenging bed linen industry by expanding its market share from 22% in 2008 to more than one-third currently. We see deep value in the company as its dominant market share as a result of dedicated commitment by the management team over the years will be difficult to replicate.

More Home’s Harmony. Currently, YOCB owns and operates 20 Home’s Harmony, which is the in-house retail outlet under its belt. Moving forward, we understand that the Group is lining up three new stores openings in FY17 with marketing strategies such as loyalty program and promotions with banks and credit-card companies to reach out to more consumers. We believe the expansion trend of its own retail outlets bodes well for YOCB as it will not only expand its earnings margin but also enhance the brand name recognition in tandem with the growing presence.

Underneath investors’ radar. As an under-researched company, YOCB has been trading at low valuation with last trading price representing 9x PER FY17E which is appealing vis-à-vis the relative peers in the retail industry which are trading at 11x-13x Fwd PER. Furthermore, note that AEON (UP; TP: RM2.14), one of YOCB’s biggest partner in retailing its product is trading at 24x PER FY17E. We opine that the modest valuation is unjustified considering its proven track record, dominant market share and strategic partnership with major departmental stores. Thus, we believe investors who are seeking for exposure in the retail industry should capitalize on the valuation gap.

Healthy growth envisaged. Moving forward, we envisage YOCB to carry on the growth story as the demand is fuelled by growing urbanization and higher demand for higher-end home linens while the Group is also eyeing to expand the commercial sector (hospital and hotel). In view of the steady demand and growing numbers of in-house retail outlets, we are projecting the Group to achieve FY16E-FY17E net profits of RM21.0m-RM22.9m, which represent growth of 13.4%-8.9%.

Trading Buy with Fair Value of RM1.50. We derive our FV of RM1.50 based on 10.5x PER FY17E, 20% discount to the valuation we ascribed to PADINI (OP; TP: RM2.78) in view of its smaller market capitalization as well as fewer numbers of outlets. Its position as dominant market leader and time-proven track record in the industry is elusive intangible assets investors should look beyond on top of its sustainable earnings growth moving forward and solid fundamental while its strong brand names could be further enhanced in tandem with the openings of more in-house retail outlets.

Source: Kenanga Research - 11 Jul 2016