Weak sales momentum seen as a concern for Bonia

This article first appeared in The Edge Financial Daily, on July 18, 2019.
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Bonia Corp Bhd
(July 17, 31.5 sen)
Maintain sell with a target price (TP) of 28 sen:
Post our meeting with management, we continue to see tough times ahead for Bonia Corp Bhd. While its recent earnings decline was lessened by management’s cost-reduction initiatives, weak sales momentum remains a key concern for the company.

We tweak our earnings per share (EPS) estimates to reflect improved margins as well as lower taxation rates.

To recap, Bonia has suffered from multiple consecutive quarters of sales declines, as business conditions became more challenging after the GST’s implementation as well as the heightened competition in the retail market.

Despite that, core earnings recovered for the group in 3QFY19, arising from margin improvements after various cost-cutting measures undertaken including consolidation of outlets and staff expenditure.

We understand that net closures of outlets, particularly for consignment counters, have been largely completed following Bonia’s three-year consolidation and realignment phase undertaken since financial year 2017 (FY17). Following on, the group is looking to increase net openings of boutique stores and counters in financial year 2020 (FY20), accompanied by higher advertising and promotion (A&P) to raise its brand presence.

The negative same-store sales growth trend has persisted in the cumulative nine months of 2019 (9MFY19), with only its Braun Buffel outlets recording positive momentum. We believe an organic sales recovery might not transpire at least until the second half of financial year ending 2020 (2HFY20), given the lack of encouraging signs observed thus far.

Because of that, we foresee earnings at the profit before tax level to be largely flattish in FY20.

However, we gather that the elevated taxation issue related to an alleged value added tax shortfall at its Indonesian operations should be resolved, giving rise to core profit after tax growth next year.

Ultimately, we are still cautious about the group’s prospects, owing to its unexciting sales performance amid heightened competition in fashion retail. — Affin Hwang Capital, July 17