Bonia Corp Bhd
(Dec 20, 22 sen)
Maintain sell with a lower target price (TP) of 17 sen: To recap, Bonia Corp Bhd recorded a disappointing first quarter of financial year 2019 (1QFY19) start to the year, with core net profit declining 64% year-on-year (y-o-y) due to declining sales across brands in both the local market (-8% y-o-y) as well as its overseas market (-20% y-o-y), consequently compressing margins against a high operating leverage.
It also fared worse sequentially, highlighting that the tax holiday from the zero-rating of the goods and services tax was not a boon for the retailer, but rather went towards large-ticket purchases. The group’s same store sales growth (SSSG) continued to decline y-o-y across the board, save for its consignment counters which have undergone a heavy rationalisation exercise.
For its external brands, management intends to further capitalise on its highly profitable Braun Buffel leatherwear brand by expanding across new markets, while scaling back on its loss-making licensed apparel brands which are getting edged out by larger players with better scale. On the other hand, management is maintaining efforts to build up its in-house core brands, Bonia and Sembonia, through a revamp in their sales approach.
As part of management’s plan to boost Bonia’s market positioning, the group is expected to incur further advertising and promotion (A&P) expenditure and will continue to have high capital expenditure commitments, hence a damper to its near-term earnings.
While a meaningful turnaround in sales from the shift in marketing strategy may take at least six to nine months, we expect the negative SSSG trend to persist in FY19 estimate (FY19E) and the first quarter of FY20E. Competition from budding entrants and established international players (online and omnichannel retailers in particular) will also remain stiff.
We remain cautious on Bonia’s prospects, as the near-term earnings outlook appears muted. We cut FY20E and FY21E earnings by 16% and 22% on account of higher recurring A&P expenditure and subsequently reiterate our “sell” call, with a revised TP of 17 sen from 21 sen previously. This is based on a 13 times price-earning target on calendar year 2019 estimate earnings per share. The upside risks include better-than-expected recovery in sales, and lower-than-expected operating expenditure. — Affin Hwang Capital Research, Dec 20