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Will Bonia’s strategy pay off?
Shalini Kumar 
Bonia is seeing renewed investor interest following its business consolidation strategy over the last two years
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Bonia Corporation Bhd has posted positive earnings in FY17 including its latest fourth quarter ending June 30, 2017, but analysts are unsure if the company’s strategy to move into higher margin products will pay off. The company is mainly involved in the manufacturing and retailing of luxury leatherwear, apparel, accessories as well as licensed international brands such as Braun Buffel.

To improve its earnings potential, Bonia has adjusted its pricing strategy by introducing higher-margin products, reducing discounts given out to customers as well as adjusting the prices for new product ranges, in particular for the Bonia and Braun Buffel brands.

But will this be enough to sustain its profit record? Analysts say it could be a tough road ahead for Bonia.

“If they are targeting higher margin products, with the current market growth, it’s going to be a challenge. There are also more brands in the local market that they have to compete against,” a fund manager tells FocusM.  And it doesn’t help that the local retail sector is going through challenging times with weak consumer sentiments.

However, Bonia’s move to consolidate operations seems to have had a positive impact on its bottom line. In the last two years, Bonia has moved to close non-performing stores and consignment counters as part of its operational consolidation strategy.

In FY17, Bonia closed a total of six boutiques and more than 100 consignment counters. In FY18, it aims to close at least another 100 counters (across the board) and six more boutiques. This has led to renewed investor interest in the stock and several re-rating calls from research houses.

For the fourth quarter ended June 30, the group recorded a doubling in its net profit to RM7.7 mil, from RM3.8 mil in the previous corresponding quarter. Its revenue, however, dipped to RM153.4 mil, from RM159.8 mil a year before.

For the full year, Bonia’s net profit rose to RM31.7 mil from RM24.4 mil, despite a  lower revenue of RM613.2 mil against RM665.4 mil in FY16. “The higher profit before tax achieved was also due to lower fair value adjustments on investment properties of RM238,000 for the current quarter as compared with last year’s RM2.66 mil,” it says.

In the past one year, Bonia’s shares appreciated 5.69% from 61.5 sen a year ago to close at 65 sen on Nov 1.

 

Poor consumer sentiments

Overall, the outlook for the retail sector is not rosy. The Malaysia Retail Industry Report for the second quarter says its members are not optimistic about their business prospects in the next three months. As such, Retail Group Malaysia has revised its annual growth forecast downwards to 3.7% from 3.9% for the retail industry in 2017 – its second revision for the year.

Bonia itself acknowledges that the retail sector is becoming more challenging, given the uncertain economic outlook, weak ringgit and diminishing consumer spending power.

“The rising cost of living and weak ringgit has negatively affected consumer spending power. In addition, the influx of online marketing has directly or indirectly affected the retail infrastructure,” it says.

Pricing pressures on retail will likely remain. In a recent note, Affin Hwang Research says Bonia’s sales will remain soft. “While the group intends to focus on higher-margin products, we believe that top line will remain muted on weak demand for consumer discretionary products,” says the research house.

The research house also notes that there has been no meaningful recovery in sales yet.

In Q4FY17, Bonia showed same-store sales growth (SSSG) of 2% for Malaysia, 0% for Singapore, -6% for Indonesia and -9% for Vietnam, signalling “weakness in the retail sector”. On a full year basis, all key markets reported negative SSSG, ranging from -4% for Singapore to -19% for Vietnam.

 

Some analysts see promise

But there may be a silver lining ahead still. Despite the general view that Bonia’s focus on higher margin products would not translate to higher sales, Affin Hwang Research has raised its call on the stock to hold, with a higher target price of 55 sen from 50 sen previously. “We raise our FY18-19E forecasts by 7-10%, assuming higher EBIT (earnings before interest and taxes) margins underpinned by efforts to improve product mix and rationalise non-performing stores,” it says.

AmBank Research also upgraded its call to buy from hold with a higher fair value of 75 sen from 66 sen previously.

“In-store sales have been contracting since Q1FY15, which coincided with the introduction of GST. However, given the multiple year-on-year quarterly revenue contractions, we imagine for Bonia’s prospect to gradually recover going forward. Braun Buffel has seen two consecutive quarters of positive SSSG and narrowing contractions by Bonia point to a sign of recovery,” it says.

Looking ahead, Bonia says it will focus and channel the resources on house brands namely, Bonia, Braun Buffel, Carlo Rino and Sembonia, consolidate and improve the performance of its licensed brands, as well as continue to develop and strengthen its overseas markets, in particular, Indonesia, Vietnam and some Middle East countries. 



This article first appeared in Focus Malaysia Issue 257.