This article first appeared in The Edge Financial Daily, on April 11, 2016.

KUALA LUMPUR: Losses are mounting at retailer Asia Brands Bhd, whose stable of fashion brands includes Anakku, Audrey, Mickey Junior, B U M Equipment and Diesel, and its fortunes are unlikely to turn around anytime soon as its business continues to face challenges.

Until recently, Asia Brands was seen as an up-and-coming retail stock to buy, powered by a new management that had bet on aggressive expansion to help it grow market share and boost its revenue growth.

The group was on track for its next phase of growth with the acquisition of Hing Yiap Group Bhd in December 2012 that resulted in an amalgamation of its baby products, Anakku and Disney Baby, as well as popular lingerie brand Audrey and that of casual wear lines such as B U M Equipment, Diesel, Antioni and Anakku Junior.

Asia Brands had appeared to be making progress, posting a record net profit of RM30.24 million for the financial year ended March 31, 2014 (FY14), a 76% increase from RM17.2 million in FY13. Revenue for FY14 also grew by 70% to an all-time high of RM320.46 million from RM188.88 million the previous year.

Asia Brands’ share price also hit its all-time high of RM4.08 on Nov 1, 2013, but began a long slide since then. The share price had fallen 51% in the past year to its RM1.20 close on April 7 from RM2.47 on April 8, 2015.

What went wrong?

The firm could not sustain the improved performance, citing pressures from poor economic conditions, a weakened ringgit against the US dollar and cautious consumer spending which, in turn, led to heightened competition.

The wider retail industry was also hit by the implementation of the goods and services tax (GST) in April 2015 that hurt sales.

The combination of factors took its toll on Asia Brands as it slipped into a net loss of RM3.85 million for the third financial quarter ended Dec 31, 2014 (3QFY15). Its net loss widened to RM5.61 million in 3QFY16, due to weakened consumer sentiment and a tough operating environment post-GST.

In its annual report 2015, Asia Brands group chairman Ng Chin Huat said the group was overambitious in its expansion plan.

“With hindsight, the strategy to expand was an ambitious one aimed at securing bigger retail presence for our brands. We realised that it was not the right timing as we had not foreseen consumer spending to turn so cautious.

“It was indeed a lesson well learnt and we are taking the necessary steps to rectify the situation and implement our rationalisation [plan] for the group,” the 46-year-old, who is also a substantial shareholder of the company with a 57.05% stake, said.

Ng also noted that the casual wear business had become a drag on the group’s earnings due to unprofitable retail stores.

Looking at the financial results for the cumulative nine-month period of FY16 ended Dec 31, 2015 (9MFY16) suggests that the group has yet to find its mojo, with a net loss of RM15.49 million.

In a note to clients on Nov 30, 2015, Kenanga Research said Asia Brands’ net loss of RM9.88 million for the six-month period ended Sept 30, 2015 came in below its in-house full-year net profit estimate of RM1.2 million for FY16.

“In view of the worse-than-expected results, absence of catalysts and the lack of investment interests, we have decided to drop Asia Brands from our core coverage,” it said.

Comparing Asia Brands with other listed apparel retailers such as Padini Holdings Bhd and Bonia Corp Bhd puts the effectiveness of its management in the spotlight. While Bonia also saw a drop in its earnings for the six-month period ended Dec 31, 2015, it still managed to rake in profit, albeit 

lower.

On the other hand, Padini’s net profit nearly doubled to RM64.9 million in the six months ended Dec 31, 2015.

Asia Brands’ fifth consecutive quarter of losses put a dent in its balance sheet. The group saw a higher net debt-to-equity ratio of 0.74 as at Dec 31, 2015, from 0.7 a year ago.

However, the current ratio improved from 1.84 to 2.37, while the quick ratio also saw an improvement from 0.64 to 0.83, suggesting an improvement in Asia Brands’ ability to repay short-term liabilities.

This was probably because of an increase in long-term borrowings to RM130 million as at Dec 31, 2015, from RM83 million a year ago, while short-term borrowings were reduced to RM49.8 million from RM97.6 million.

This was reflected in a 15% higher finance cost of RM8.07 million in 9MFY16, compared with RM7.01 million in 9MFY15.

With higher financing cost, margins will be pressured even further unless Asia Brands’ turnaround plan comes to fruition.

Cash flow interest coverage had deteriorated to 1.63 times as at Dec 31, 2015, from 3.81 times a year ago, as the operating cash flow of the group was affected by weakened earnings. While the cash flow is still able to cover the interest paid, it is a cause for concern given that the cash flow which covered the interest paid is only at 1.63 times.

On the positive side, Asia Brands’ inventories had come down by 11.2% to RM164.5 million as at Dec 31, 2015, from RM185.2 million a year ago, in line with the group’s direction to clear ageing stocks.

It also has established strong brands to count on, especially its baby product segment whose contribution to the group’s revenue grew from 46% in FY14 to 54% in FY15.

Asia Brands has an average 10-year dividend yield of 4.14%, although no dividend was declared for FY15. At the current price of RM1.20 per share, it is trading at 0.42 times its book value, with a market capitalisation of RM94.94 million.