Asia Brands Bhd
(Nov 18, RM3.30)
Maintain market perform with reduced target price of RM3.44: Reported net profit for the first half of financial year 2015 ending March (1HFY15) of RM11.6 million (+20.4%) was below our expectations, accounting for 38% of our full-year forecast. No consensus was available as the stock is not widely tracked by analysts.

The negative variance is due to the higher-than-expected operating costs on the back of higher-than-expected promotional expenses. No dividend was declared, as expected.

Year-to-date, 1H revenue recorded growth of 7.5% to RM172.1million, driven by aggressive promotional activities. Core net profit of RM11.6million was 20.4% higher vis-à-vis RM9.6million (after excluding a one-off asset diaposal gain of RM6.6 million), thanks to the higher gross margin of 50.9%, up 0.9 of a percentage point as a reflection of higher efficiency in the new business model of brand management.

Year-on-year, second-quarter revenue inched up by 2.5% thanks to the contribution from the opening of a new outlet. However, higher expenses in relation to commission, pricing discounts and fair expenses in order to boost sales and fend off competition inflated operating expenses by 39.6%, which in turn brought operating profit down by 19.1% to RM8.5 million.

Quarter-on-quarter, Hari Raya Aidilfitri revenue grew by 15.7%. However, operating margin dipped by 5.9 percentage points to 9.2% on the back of higher selling and distribution costs (15.4%), as well as higher finance costs of RM2.6 million (28.1%), which together caused net profit to decline by 40% to RM4.4 million.

We expect the retail sales business environment to remain challenging and the group will have to embark on aggressive marketing and promotional activities in order to boost sales due to the weak consumer sentiment.

Asia Brands is also facing tougher competition in the market following the gradual establishment of well-known international brands such as Uniqlo and H&M that provide consumers further options of trendy and value-for-money apparel.

We have tweaked our earnings forecasts by factoring in higher operating costs as we opt to be more conservative on cost assumptions in view of the persistently soft consumer sentiment. As a result, FY15E earnings were revised down by 5.9% and FY16E by 3.5%.

Maintain “market perform”. Correspondingly, with our earnings revision, our target price was adjusted to RM3.44 (from RM3.66). Our valuation is unchanged at 9.5 times FY15E price-earnings ratio, implying +0.5 standard deviation over its three-year mean.

Risks to our call are weaker-than-expected consumer sentiment and worse-than-expected competition in the retail market. — Kenanga Research, Nov 18

This article first appeared in The Edge Financial Daily, on November 19, 2014.