This article first appeared in The Edge Financial Daily, on January 6, 2016.

Bonia Corp Bhd
(Jan 5, 68 sen)
Maintain hold with a target price (TP) of 66 sen: Although we are expecting gradual improvement in overall consumer sentiment in 2016, we believe that Bonia Corp Bhd’s products will take a longer recovery time given their discretionary nature. 

In addition, we also expect the group’s regional expansion to Indonesia and Vietnam requiring more time to bear fruit. The second quarter of financial year 2016 (2QFY16) will likely be better quarter-on-quarter, but still down year-on-year (y-o-y).

We believe that sales have picked up in 2QFY16, but net profit could potentially be about 8% to 10% lower on a y-o-y basis.

We see better quarterly sales due to year-end festive spending and promotions offered by Bonia. We expect the group’s bottom line to contract by about 15% y-o-y for FY16, as we believe that consumers will remain cautious about their spending.

We forecast a margin contraction of 1.2 points for FY16, as we have factored in higher operating costs as a result of aggressive promotional activities to spur sales growth. 

Having said that, we expect consumer sentiment to improve moving into the second half of calendar year 2016 (2HCY16).

Our earnings forecasts for Bonia remain unchanged. Nevertheless, we do expect much improved consumer sentiment moving into FY17 and forecast a 16.8% growth in earnings for the period. We believe the group’s margins will be buoyed by its overseas expansion in the longer term.

Key downside risks include a regional slowdown in consumer spending and stiffer-than-expected competition. Upside risks include better domestic consumer sentiment and lower operating expenditure. — AffinHwang Capital, Jan 5