Tuesday 19 March 2013

Bonia Corporation - Intensifying competition ahead

INVESTMENT MERIT
- A dip in 1H13 earnings. Bonia’s 1H13 net profit (NP) of RM23.0m was below our expectation of RM54.7m but within the consensus estimate of RM48.1m, accounting for 42.1% and 47.9% of both the numbers respectively. Despite recording a higher revenue, the 2Q13 NP dipped 43.0% YoY to RM7.5m from RM13.2m in the preceding year, mainly attributed to: (i) a slower than expected new stores sales volume and (ii) higher costs from its business expansion activities in Indonesia and Vietnam.

- Further margin compression? The group experienced a squeeze in its 1H13 EBIT margin (-5.4ppt YoY to 13.1%) due to higher operating expenses from the increase in personnel cost and overseas business expansion activities (Indonesia, Vietnam and Singapore). The expansion had incurred high initial investment costs, e.g. new store renovations, marketing expenses and rental cost to the group. We do not foresee any meaningful earnings contribution from the overseas market over the immediate term as their earnings are likely to stream in 2-3 years after the store openings.

- Challenging retail outlook. The retail outlook in 2013 could remain challenging due to stiff competitions from its domestic and international peers. The higher sales and promotional activities needed thus are likely to further grind down retailers’ profitability and margins.

- Downgrade TP to RM2.47. We have lowered our FY13 earnings projection to RM49.5m from RM55.0m (-10.0%). At the same time, we also saw a derating in retail fashion sub-segment. As such, we have also lowered our TP to RM2.47 (from RM2.90 previously) based on a 5-year average PER of 10.3x (vs 10.7x previously).

- Maintain Trading Buy, as we believe the negative outlook could have factored into the share price. The stock could eventually re-rate to our revised TP, translating into 23.5% upside from here.

SWOT ANALYSIS
- Strength: i) Strong brand recognition ii) Net cash position
- Weaknesses: Compressed profit margin
- Opportunities: Venture into emerging markets
- Threats: i) Slower than expected consumer spending ii) intensifying competition from peers

TECHNICALS
- Resistance: RM2.30 (R1), RM2.60 (R2)
- Support: RM2.00 (S1), RM1.60 (S2)
- Comments: At yesterday’s closing price of RM2.00, BONIA is trading at a critical support-cum-psychological level. Some support may exist at this level. However, the overall technical picture is firmly bearish, and chances are that the RM2.00 trigger line would be violated. Should this be the case, the share price could potentially extend its losses towards RM1.60 next.


THE COMPANY
- BONIA is involved in the manufacturing, marketing, retailing and distribution of high-fashion branded leatherwear, men's apparel and accessories. It operates through a network of over 883 sales outlets and 103 boutiques around the world.

- Apart from its flagship label of BONIA, the group also operates successful brands such as SEMBONIA and CARLO RINO and holds licenses for various international labels, distributorship and dealerships of leading brands including Santa Barbara Polo, Austin Reed, Valentino Rudy And Jeep, among others.

THE BUSINESS
- BONIA has three business segments: i) Retailing, ii) Manufacturing, and iii) Investment & Property Development.

- BONIA's retailing segment is engaged in the designing, promoting and marketing of fashionable apparels, footwear, accessories and leather goods. The manufacturing segment involves the manufacturing and marketing of fashionable leather goods while its third segment i.e. investment and property development is involved in investment holding, rental and development of commercial properties.

- Recently, BONIA, via its Singapore subsidiary, was appointed as the master Franchisee for Renoma Café Gallery from its Licensor, Renoma S.T.A.R for Malaysia, Singapore and Indonesia. The first Renoma Café Gallery is launched by the end of 2012.

Source: Kenanga

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