This article first appeared in The Edge Malaysia Weekly on September 18, 2017 - September 24, 2017

SHARES in Bonia Corp Bhd rose with renewed vigour after the fashion retailer reported better-than-expected fourth-quarter results on Aug 30. Between then and Sept 12, the stock rose 17.7% to 66.5 sen.

Bonia’s net profit for the fourth quarter ended June 30 doubled to RM7.68 million from the previous corresponding period, which saw the group close FY2017 with a year-on-year earnings growth of 30.2% to RM31.73 million.

The group attributed its improved bottom line to the higher gross profit margin it achieved during the year, thanks to its continuous effort to control operating costs.

This was despite revenue slipping 4% year on year to RM153.39 million as the group consolidated its non-performing outlets and consignment counters.

The marked improvement in its net profit prompted AmInvestment Bank Research and CIMB Investment Bank Research to upgrade their recommendation on the stock to “buy” from “hold”. Affin Hwang Investment Bank Research maintained its “hold” call on the counter.

As Bonia turns the corner, its stock could start looking attractive to investors, given its comparatively cheaper valuations.

At 64 sen last Thursday, Bonia was trading at a trailing 12-month price-earnings ratio of 16.28 times — below that of its peers Padini Holdings Bhd (19.02 times), Hai-O Enterprise Bhd (27.35 times) and AEON Co. (M) Bhd (36.2 times). Parkson Holdings Bhd is loss-making.

The fashion retailer has been through some difficult times in recent years with the ringgit weakening against the US dollar and driving up the cost of goods, and the implementation of the Goods and Services Tax hurting consumer sentiment.

However, a change in strategy this year and less volatile foreign exchange rates seem to have helped Bonia regain its footing.

The company has been consolidating its operations by shutting down non-performing stores and consignment counters. AmInvestment estimates that Bonia has closed 22% of its consignment counters, leaving only 984 counters open as at 4QFY2017.

Also, instead of offering bigger discounts to drive sales as it did in the previous financial year, Bonia has been adjusting its pricing strategy by introducing higher-margin products and reducing the discounts, especially for its upmarket brands Bonia and Braun Büffel.

AmInvestment highlights in a research note that the company’s gross margin for FY2017 improved by 3.5 percentage points to 58.6% on the back of higher average selling prices (ASPs).

“Recall that margins contracted to a multi-year low in FY2016 (55%) from an average of 61%, off the back of higher US dollar-led input costs. Given the stability of foreign exchange rates, there may be an upside for margins should management raise ASPs further in FY2018.

“Apart from that, we expect the cost-savings associated with the closure of 22% of its consignment stores to trickle down to its earnings before interest and taxes (Ebit) margins going into FY2018,” says the research house.

CIMB opines that the better earnings are also a result of better cost control and lower advertising and promotional expenses during the year.

The research house says the highlight of FY2017 is the growth of Bonia’s Indonesian business, which it believes is becoming a significant contributor to the group’s sales and earnings.

According to Bonia’s 2016 annual report, Indonesia contributed 2.9% to the group’s revenue in FY2016. CIMB estimates this to have grown to 6.3% in FY2017. “This is mostly because of the opening of additional Braun Büffel boutiques and 23 counters in Indonesia in September last year,” it says.

While analysts appear optimistic about Bonia’s prospects going forward, the group is a bit more conservative. In its 4QFY2017 results announcement, the group says it expects prospects to remain challenging going forward, given the uncertain economic outlook.

“With the continued increase in imported merchandise cost due to the weakened ringgit, the group will continue to monitor its operating cost and cautiously adjust its selling price to cope with the rising cost of operation.”

Bonia adds that it will also continue to consolidate its business by closing down non-performing outlets and strive to improve its gross margins. At the same time, it plans to develop and strengthen its markets in Indonesia, Vietnam and some of the Middle Eastern countries.

Though the group remains cautious, there is some good news for it.

The Consumer Sentiments Index inched up to 80.7 points in 2Q2017, rising for the third consecutive quarter, although it is still below the 100-point threshold.

At the same time, July’s Volume Index of Wholesale and Retail Trade — a key indicator of real private consumption — maintained its double-digit pace, growing 12.9% year on year for the fourth straight month, according to Maybank Investment Bank Research. This was attributed to seasonal spending during the fasting month and Hari Raya Puasa celebrations in June and July.

The research house says there are indications of consumer spending gaining momentum in the third quarter, evidenced by the fastest growth in domestic purchases by local credit cardholders in 11 months, and tourist spending, as tracked by local purchases by foreign credit cardholders, continuing to grow.

At its 64 sen close last Thursday, Bonia’s share price had risen 16.8% year to date. The average target price for the stock, based on Bloomberg consensus, is 71 sen.

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