Cost improvement may help Bonia in earnings recovery

This article first appeared in The Edge Financial Daily, on July 19, 2019.
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Bonia Corp Bhd
(July 18, 31.5 sen)
Maintain hold with a higher target price (TP) of 31 sen:
Over the past two years, Bonia Corp Bhd has embarked on a store-consolidation drive to arrest sales declines caused by weak demand post goods and services tax implementation in 2015. The total number of its outlets has declined since financial year 2017 (FY17) as the company closed down loss-making ones. We gathered from our recent meeting that Bonia is at the tail end of the store-consolidation phase and will slow down point-of-sale (POS) closures. Moving forward, Bonia may restart POS expansion on a measured basis.

We believe a key headwind to Bonia’s efforts to turn around earnings is intense competition in luxury personal goods. A number of large international luxury brands, such as Tapestry Inc and Capri Holdings Ltd, have consolidated in recent years, leveraging their economies of scale and wider reaches to gain market share in Bonia’s key target markets. In our view, enhanced promotional efforts backed by an established global brand presence place such international brands on a stronger footing than Bonia.

Our in-house consumer survey revealed that consumers prioritise value over price and quality when making purchases. We think that this does not bode well for Bonia in the near term, presenting a challenge to the group’s aspirations to elevate its status in the premium luxury segment and its reluctance to offer steep discounts.

On a positive note, we believe some earnings recovery could be achieved through cost improvements as a result of its POS consolidation efforts and internal restructuring. Hence, we are keeping to our expectations of a 0.7-percentage-point year-on-year improvement in earnings before interest, taxes, depreciation and amortisation margins for FY20. For now, we have made no changes to our earnings forecasts.

As the earnings outlook for Bonia remains uncertain in the near term, we have changed our TP basis from price-to-earnings (PE) to price-to-book value (P/BV). Our new TP of 31 sen is based on 0.7 times calendar year 2020 forecast (CY20F) P/BV (-1 standard deviation below its five-year mean) versus 24 sen based on 12.5 times CY20F PE previously. We are keeping our “hold” call as Bonia’s share price appears supported as it trades close to 0.7 times 12-month forward P/BV and lacks significant rerating catalysts. — CGSCIMB Research, July 17