INVESTMENT MERIT

We are bringing a closure to our previous ‘Trading Buy’ call on YOCB given that its share price has performed relatively well with a year-to-date return of 24%. Furthermore, we believe the positives have been priced in at a Fair Value of RM1.35. We foresee YOCB to continue expanding its in-house retail outlets to maintain sustainable demand for its brands. Sales are also supported by supply to overseas and hospitality-based institutions, as well as a growing list of resorts and hotels.

YTD share price surged 24% with decent results. Since our last “Trading Buy” call with fair value of RM1.50 back in July 2016, YOCB has matched our expectation hitting 100% of our earnings assumptions for FY16 (RM21.0m) and FY17 (RM22.8m), by registering higher net profit of RM20.9m (+13%) in FY16, and subsequently continued to register higher net profit in FY17 of RM22.7m (+9%). Furthermore, its share price has performed relatively well since beginning of the year, registering a year-to-date return of 24%. We believe the higher earnings growth was driven by the expansion of its in-house retail outlets further supported by its institutional clientele as well as astounding success in overseas markets. Additionally, the group’s domestic operations continued to be the main driver with bed linen and bedding accessories making up the bulk of the revenue.

Wider chain of Home’s Harmony outlets. The products under YOCB’s home-grown brands were sold through 20 fully-owned boutiques shops (Home’s Harmony), and more than 250 counters at premier departmental stores, specialty stores, hypermarkets and intermediaries. For FY18, we understand that the Group is lining up four new stores openings, and we believe the expansion of the inhouse retails outlet bodes well for YOCB in growing its presence, enhancing the brand name recognition, while expanding its earnings margin.

The local retail market is expected to remain challenging and competitive. Moving forward, the group believes that the recovery in the global financial crisis is still uncertain and the local retail market will remain challenging and competitive, which may affect their domestic performance (at 83% of the revenue) and their export markets in the region (at 17% of the revenue). Nonetheless, the group expects a satisfactory growth in the financial performance of the Group for the coming financial year ending 30 June 2018 with plans and strategies already in place to weather these challenging times.

Expecting earnings growth to be at single-digit of 3%/6% for FY18/FY19, respectively. Moving forward, we are projecting the Group to achieve FY18E/FY19E Net Profits of RM23.4m/RM24.7m, which represent growth of 3%/6%, respectively, as we believe YOCB will continue expanding its in-house retail outlets, while extending its supply to overseas and hospitality-based institutions. However, due to the nature of its products, the earnings growth is limited to single-digit attributed to lower inventory turnover rate at an average of 2.5x compared to PADINI (OP : TP : RM4.60)’s inventory turnover rate of 7x and BONIA (Not Rated)’s inventory turnover rate of 5x.

NOT RATED with Fair Value of RM1.35, based on 9.4x FY18 PER (in line with 3-year average mean PER), 30% discount to the valuation, we ascribed to PADINI (OP; TP: RM4.60) in view of its smaller market capitalization as well as (i) fewer numbers of outlets at 23 outlets (PADINI: 237 outlets), (ii) lower inventory turnover rate at an average of 2.5x (PADINI :7x), and lower ROE of 13% (PADINI: 26%). As such, we closed our position with a NOT RATED call as we believe the positives have been priced in, and we see limited upside with the single-digit growth in earnings assumptions, moving forward.

Source: Kenanga Research - 26 Sept 2017