Bonia Corp Bhd
(March 24, RM1.01)
Maintain hold with unchanged target price of RM1.03. Based on earnings results for the second quarter ended December 2014 of financial year 2015 (2QFY15) and our recent visit with management, we remain cautious on the group as we believe its core market, Malaysia, will be weighed down by short-term weakness in consumer sentiment. 

Although we expect its regional stores to do well in the long term, they might not be strong enough to offset short-term weakness. 

We believe that the downtrend in Bonia’s first half FY15 sales in Malaysia will continue into 4QFY15, post implementation of the goods and services tax. 

This could spill over into 1QFY16, as sales may be dampened by consumers pulling back on expenditure, particularly discretionary items.

Fortunately, the company’s overseas operations, particularly Indonesia and Vietnam, should progressively contribute to the top and bottom lines, as these markets offer growth opportunities in view of their growing economies, rising middle class and increasing affluence compared with Malaysia and Singapore, where economic growth is expected to be smaller.

We retain our earnings forecasts at this juncture. We maintain our “hold” call given the difficult retail environment in Malaysia, which we expect to continue to weigh on earnings. 

We see limited share price upside in the short term and the stock’s lower-than-1% 2016 dividend yield does not look compelling.

We believe this is appropriate, as we expect the group’s overseas expansion and improving product mix to mitigate weakness in the domestic market and provide support for longer-term margins. 

Key downside risks to our view include a regional slowdown in consumer spending and stiffer-than-expected competition should another renowned leather retailer enter the region. 

Upside risks include stronger-than-expected consumer spending on discretionary products and lower-than-expected operating expenses. — Affin Hwang Capital, March 24

This article first appeared in The Edge Financial Daily, on March 25, 2015.