BONIA is poised for growth through a partnership with the Malaysian subsidiary of a leading Hong Kong based fashion retailer, focusing on the youth streetwear market. Furthermore, its shift to digital branding and boutique retailing aligns with the evolving consumer trends. Despite current subdued consumer sentiment, an improvement is expected in 2HCY24, influenced by clearer subsidy rationalization plans from the government. BONIA's net profit is projected to rise to RM47m in FY25, a 35% YoY increase from RM35m in FY24. An 'ADD' rating has been given to BONIA, with a fair value of RM1.98, representing a 30% discount to the sector leader's PER.

Embracing streetwear. BONIA is poised for expansion through a proposed collaboration with the Malaysian subsidiary of a prominent Hong-Kong based fashion retailer. This venture involves an initial equity investment of RM10m, granting BONIA exclusive distribution rights in Southeast Asia for a 10-year period (5+5 years). If the above venture materialises, BONIA is planning to focus on marketing apparel appealing to the younger demographic, particularly streetwear items priced between RM100 and RM300. This approach is in line with BONIA's objective to strengthen its position in the streetwear market, catering to its predominantly sub-40-year-old customer base.

Digital rebranding and demographic shift: BONIA has been harnessing the power of social media and digital marketing since FY19 to reshape its brand identity. This rebranding initiative has successfully aligned with the evolving age demographics of its customers. Currently, over 70% of BONIA's customer base is aged between 20 and 40 years, a significant shift from the previously dominant demographic of those aged 35 and above. This shift reflects BONIA's successful blend of classic elegance with contemporary design, offering a balance of physical and digital interactions. This change also mirrors a broader trend in consumer behaviour, with an increasing demand for brands that integrate digital experiences, lifestyle elements, and experiential engagement in their offerings.

Adapting to changing retail preferences: BONIA has noted a change in consumer spending patterns in recent years, especially among the younger demographic which now prefer boutique-style shopping over traditional department stores. Aligning with this trend, BONIA is expanding its boutique operations. As of the end of FY23, BONIA increased its boutique count to 101, up from 99 a year ago, while reducing its consignment counters from 301 to 244. This strategic shift is significant, with the boutique segment contributing 49% to BONIA's total turnover in FY23, surpassing the 37% from consignment. Additionally, BONIA is pivoting towards growing its brand distributorships, moving away from its previous focus on licensed business models.

Navigating subdued consumer spending: BONIA is not overly concerned over the current soft consumer spending, owing to its strategic position as a premium yet affordable contemporary brand that bridges the luxury and mass market segments. With a diverse product portfolio catering to various generations and spending capacities, BONIA is well-equipped to navigate these challenging times. The company recognizes brand recognition as a crucial factor in this climate. Therefore, BONIA is committed to enhancing the appeal of its brands through continuous product innovation and targeted marketing campaigns, aimed at elevating brand awareness.

Forecasts. BONIA's revenue fell by 3.3% YoY to RM96.4m in 1QFY24, impacted by weaker consumer sentiment and inflationrelated spending changes. The Group's PBT, meanwhile, reduced significantly by 38.5% to RM12.1m, no thanks to the increase in staff costs, higher depreciation from new boutiques, and rising finance costs due to increased borrowing. Consequently, with a higher taxation rate, the group's PAT dropped by 46% YoY to RM9.0m.

Moving forward, the current trend of weaker consumer sentiment is expected to continue through 1HCY24. Nevertheless, improvements are anticipated in 2HCY24 following more clarity from the authorities on the subsidy rationalization plan. For the full financial year, we expect BONIA to record a lower PAT of RM35.0m (-44% YoY) in FY24, with prospects of a recovery to RM47m in FY25 as consumer sentiment stabilised.

ADD rating with FV of RM1.98. We value Bonia at RM1.98, based on a targeted FY25F PER of 8.4x. This represents a 30% discount compared to the targeted 12.0x PER for the industry leader, Padini. We consider this discount reasonable, taking into account BONIA’s comparatively smaller market capitalisation and turnover. There is no change to our TP based on ESG given 3-star rating as appraised by us (see Page 5).

Risks to our call include: (i) weaker-than-expected consumer sentiment, (ii) diminished demand for its current offerings and brand distributorship businesses, (iii) a shift towards to a less favourable mix of fashion products, and (iv) inability to raise prices to safeguard profit margins.

Source: Kenanga Research - 26 Jan 2024