Bonia Corp Bhd
(July 13, RM0.93)
Maintain hold with a lower target price (TP) of 93 sen: Following our recent conversation with the management, we expect Bonia to post weaker-than-expected results for the fourth quarter of financial year ended June 30, 2015 (4QFY15), underpinned by weaker consumer sentiment and higher operating costs. We cut our FY15 to FY17 earnings per share (EPS) forecasts to reflect a demand slowdown in the group’s domestic market. While the group’s performance in the regional markets will likely continue to be positive, we believe that this will not be sufficient to mitigate the weaker domestic demand. 

We expect Bonia to report below-consensus 4QFY15 results on the back of higher operating costs and weaker-than-expected consumer spending in Malaysia, after the implementation of the goods and services tax (GST). While Bonia has absorbed the cost of the 6% GST, sales still dropped 10% to 15% month-on-month (m-o-m) for April, and did not rebound much in May. Hence, despite the upcoming Hari Raya Aidilfitri festivities, we think that a stronger June may not be sufficient to offset the negatives.

Thus, we are lowering our 2015 to 2017 (estimated) EPS forecasts by 8% to 11%, as we incorporate higher advertising and promotion spending as well as lower our revenue assumptions for the group’s Malaysian outfit, as it continues to face a challenging retail environment, where consumers are still tightening their purse strings and reeling back purchases.

While we believe that the group’s regional markets will be supportive of its longer-term margins, we believe that this will be insufficient to compensate for the near-term softer retail environment in Malaysia. Following the revision of our earnings forecasts, our TP is lowered based on an unchanged price-earnings ratio (PER) of 14 times calendar year 2016 EPS, in line with the stock’s two-year historical PER.

Key downside risks to our view include a regional slowdown in consumer spending and stiffer-than-expected competition should another renowned leather retailer enter this region. Upside risks include better domestic consumer sentiment and lower operating expenses. — Affin Hwang Capital, July 13

This article first appeared in The Edge Financial Daily, on July 14, 2015.