Despite prevailing external uncertainties, there appears a consensus among market observers that domestic consumption will remain comparatively resilient. This expectation is predicated on several factors, including the country’s relatively low unemployment rate. A higher degree of job security means that consumers would be more inclined to spend.
The new remuneration scheme for the country’s 1.4 million civil servants, effective January this year, will raise salaries by between 7% and 13%. The pay rise should also indirectly raise income levels for those working in the private sector. In addition, the government is handing out cash to students and low-income households. Coupled with expectations that inflation has peaked, rising disposable incomes are expected to be supportive of consumer spending going forward.
The Retail Group Malaysia recently forecast sales growth of 6% this year, just slightly lower than that estimated for 2011. Indeed, retailers in the country have been chalking up robust sales in the last two quarters.
Strong y-o-y growth in 3Q11 for Padini and Bonia
Padini reported 30% year-on-year (y-o-y) sales growth in 3Q11 to RM178.1 million while net profit was up 47% y-o-y to RM26.9 million. The company attributed the strong growth to higher spending during the Mega Sale period as well as the Hari Raya Aidilfitri celebrations.
Top line sales were also boosted by Padini’s move to focus on its Brands Outlet, a value-for-money concept store targeted at the mid- to lower-income households. The store carries the company’s lower end in-house brands as well as a wide range of consignment brands. The comparatively affordable pricing generates greater volume sales. Even though product margins are thinner, the higher sales volume, simpler store design and larger space translate into economies of scale and overall cost savings.
Clearly, the strategy is working. Padini opened three new Brands Outlets in its last financial year ended June 2011, bringing the total to 13 — even as it streamlined its network of standalone stores from 50 to 45.
Overall gross floor area expanded by some 7.6% while total sales grew at a slightly faster pace of 9.6% in the last financial year. Looking ahead, the company is planning more Brands Outlets as well as the larger concept stores.
Similarly, Bonia reported strong sales growth of 49% y-o-y to RM152.2 million in 3Q11, the first quarter of the company’s financial year ending June 2012. To be sure, the numbers are not directly comparable as sales in 1QFY12 were boosted by contributions from subsidiary, Jeco Group, which was acquired in late December 2010. Still, stripping this out, the company’s sales are estimated to have expanded in the low double digits. Net profit doubled to RM20 million from the previous corresponding quarter.
While Padini has remained focused on its homegrown brand names and branching out into the lower income market segment, Bonia is adopting a different growth strategy. The company’s acquisition of Jeco means that it now complements its own brand names with international labels such as Renoma, Pierre Cardin, Bruno Magli and Braun Buffel.
Most recently, Bonia announced the acquisition of a 49% stake in Braun GmbH and Braun KG, the Germany-based owner of the Braun Buffel brand name, for some RM13 million. The purchase will allow the company to expand its geographical rights to market leather products and accessories under the brand name.
Upcoming 4Q11 results expected to be positive
Sales in 4Q11 are expected to remain robust, with the traditionally strong year-end spending bolstered by an early Chinese New Year. Thus, we would expect the upcoming 2QFY12 earnings results for Padini and Bonia to be positive.
One of the biggest risk factors for retailers is if the domestic economy turns out to be weaker than expected and consumers pull back on their spending. This could happen if the crisis in the eurozone takes a turn for the worst, buffeting financial markets and straining the fragile recovery in the US.
Slower volume sales translate into higher stock obsolescence and narrower margins given that the retail industry has a relatively high fixed cost structure.
Offering larger discounts to drive top line sales would on the other hand dampen profitability.
On balance though, we believe the global economy is in fairly good shape at the moment, albeit expected to grow at a slower pace.
Both stocks trading at modest valuations
Coming off an expected strong 1HFY12, sales and earnings in the second half of the financial year for both Padini and Bonia are likely to be slower in the absence of major festive celebrations. Nonetheless, sales and earnings for FY12 should still register positive growth from the previous year. Both stocks are currently trading at fairly decent, single-digit forward price-earnings ratios.
Based on our earnings forecast, the companies are expected to maintain their dividends at least. Padini paid net dividends totalling four sen per share while Bonia’s gross dividends totalled five sen per share in FY11. The former is sitting on net cash totalling some RM89.6 million. Bonia had net cash of RM12.4 million as at end-September 2011, before taking into account the latest acquisition of the stake in Braun Buffel.
Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.
This article appeared in The Edge Financial Daily, January 18, 2012.
The new remuneration scheme for the country’s 1.4 million civil servants, effective January this year, will raise salaries by between 7% and 13%. The pay rise should also indirectly raise income levels for those working in the private sector. In addition, the government is handing out cash to students and low-income households. Coupled with expectations that inflation has peaked, rising disposable incomes are expected to be supportive of consumer spending going forward.
The Retail Group Malaysia recently forecast sales growth of 6% this year, just slightly lower than that estimated for 2011. Indeed, retailers in the country have been chalking up robust sales in the last two quarters.
Strong y-o-y growth in 3Q11 for Padini and Bonia
Padini reported 30% year-on-year (y-o-y) sales growth in 3Q11 to RM178.1 million while net profit was up 47% y-o-y to RM26.9 million. The company attributed the strong growth to higher spending during the Mega Sale period as well as the Hari Raya Aidilfitri celebrations.
Top line sales were also boosted by Padini’s move to focus on its Brands Outlet, a value-for-money concept store targeted at the mid- to lower-income households. The store carries the company’s lower end in-house brands as well as a wide range of consignment brands. The comparatively affordable pricing generates greater volume sales. Even though product margins are thinner, the higher sales volume, simpler store design and larger space translate into economies of scale and overall cost savings.
Clearly, the strategy is working. Padini opened three new Brands Outlets in its last financial year ended June 2011, bringing the total to 13 — even as it streamlined its network of standalone stores from 50 to 45.
Overall gross floor area expanded by some 7.6% while total sales grew at a slightly faster pace of 9.6% in the last financial year. Looking ahead, the company is planning more Brands Outlets as well as the larger concept stores.
Similarly, Bonia reported strong sales growth of 49% y-o-y to RM152.2 million in 3Q11, the first quarter of the company’s financial year ending June 2012. To be sure, the numbers are not directly comparable as sales in 1QFY12 were boosted by contributions from subsidiary, Jeco Group, which was acquired in late December 2010. Still, stripping this out, the company’s sales are estimated to have expanded in the low double digits. Net profit doubled to RM20 million from the previous corresponding quarter.
While Padini has remained focused on its homegrown brand names and branching out into the lower income market segment, Bonia is adopting a different growth strategy. The company’s acquisition of Jeco means that it now complements its own brand names with international labels such as Renoma, Pierre Cardin, Bruno Magli and Braun Buffel.
Most recently, Bonia announced the acquisition of a 49% stake in Braun GmbH and Braun KG, the Germany-based owner of the Braun Buffel brand name, for some RM13 million. The purchase will allow the company to expand its geographical rights to market leather products and accessories under the brand name.
Upcoming 4Q11 results expected to be positive
Sales in 4Q11 are expected to remain robust, with the traditionally strong year-end spending bolstered by an early Chinese New Year. Thus, we would expect the upcoming 2QFY12 earnings results for Padini and Bonia to be positive.
One of the biggest risk factors for retailers is if the domestic economy turns out to be weaker than expected and consumers pull back on their spending. This could happen if the crisis in the eurozone takes a turn for the worst, buffeting financial markets and straining the fragile recovery in the US.
Slower volume sales translate into higher stock obsolescence and narrower margins given that the retail industry has a relatively high fixed cost structure.
Offering larger discounts to drive top line sales would on the other hand dampen profitability.
On balance though, we believe the global economy is in fairly good shape at the moment, albeit expected to grow at a slower pace.
Both stocks trading at modest valuations
Coming off an expected strong 1HFY12, sales and earnings in the second half of the financial year for both Padini and Bonia are likely to be slower in the absence of major festive celebrations. Nonetheless, sales and earnings for FY12 should still register positive growth from the previous year. Both stocks are currently trading at fairly decent, single-digit forward price-earnings ratios.
Based on our earnings forecast, the companies are expected to maintain their dividends at least. Padini paid net dividends totalling four sen per share while Bonia’s gross dividends totalled five sen per share in FY11. The former is sitting on net cash totalling some RM89.6 million. Bonia had net cash of RM12.4 million as at end-September 2011, before taking into account the latest acquisition of the stake in Braun Buffel.
Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.
This article appeared in The Edge Financial Daily, January 18, 2012.
