CIMB Research retains Add for Bonia Corp

KUALA LUMPUR: CIMB Equities Research is retaining its Add call for Bonia Corporation on expectations of earnings recovery from the shuttering of loss-making licensed boutiques and full-year contribution from co-owned Braun Buffel (BB) stores in Indonesia. 

It said on Tuesday it retained its target price of 84 sen. However, key downside risks include a worse-than-expected regional slowdown in consumer spending, stiffer-than-expected retail competition in the region and a significant spike in raw material costs.  

To recap, CIMB Research recently met up with Bonia’s management for a discussion with regards to Bonia’s earnings growth prospects and strategies set in place to lift recognition of its in-house brands over the long term. 

Over the past two years, the group has embarked on a series of internal restructuring and strategy realignment moves and we note that this has begun to bear fruit; its gross profit (GP) margin improved by an impressive 3.5 percentage points to 58.6% in FY17, with its core net margin bouncing back to 5.5% (from a historical low of 4.6% in FY16).  

“Management said that all its in-house brands (Bonia, Sembonia and Carlo Rino (CR)) and co-owned Braun Buffel (BB) saw GP margin improvement of three to eight percentage points on-year in FY17. 

“The improvement in GP margins can mainly be attributed to price adjustment for its Bonia and BB brands while CR and Sembonia saw reduced markdowns and discounts. 

“The group’s medium- to long-term target is to lift GP margins for BB to 70% and Bonia to 58%, for which we think its current strategy is steering the company in the right direction.   

“Other than the group’s in-house brands, Bonia also holds distribution licences for other international brands,” it said. 

CIMB Research said the group, in order to arrest the decline in profits, dhut down its loss-making licensed brand boutiques over the past few years. 

It managed to narrow its pre-tax losses to RM6mil in FY17 (from RM8.5mil loss in FY16) by closing a total of six boutiques and more than 100 consignment counters. 

“In FY18F, Bonia targets to close at least another 100 counters (across the board) and six boutiques.  

“Bonia is also committed to ensuring the long-term sustainability of its earnings by further enhancing public perception of its in-house brands. 

“The group is assimilating its strategy to that of its co-owned brand’s, significantly reducing discounts for its products and pulling back consignment counters to improve brand image. 

“Thus, efforts to reduce promotions are, in our view, beneficial in the long term. The group will also have better control over the pricing of its products, which will in turn lift margins,” it said.

CIMB Research said even though Bonia’s share price has gained c.8% since the beginning of September, it thinks that there is still plenty of room for upside and the stock is still trading at a discount to its intrinsic value. 

“Our end-2018 target price is lifted to 84 sen, still pegged to an unchanged target multiple of 16.8 times (c.10% discount to CY19 average peer P/E of 19 times),” it said.