Malaysian Fashion stocks look attractive

Fashion stocks look attractive

Written by Sam Koh

Monday, 11 October 2010 14:57

KUALA LUMPUR: Not so long ago, Malaysian fashion brands were largely unknown. Those that were known, with the exception of international fashion labels such as Jimmy Choo and Zang Toi, were often scorned as backward and out-dated. But views have noticeably improved over the past few years with the rise of homegrown fashion houses like Padini Holdings Bhd, Bonia Corp Bhd and Voir Holdings Bhd. These companies have successfully created an entire range of household brand names for ladies’ wear, men’s wear, kids’ apparel, sportswear as well as accessories and home furnishings. Flagship brands for Padini include Vincci, Padini, SEED and Padini Authentics while Voir’s stable of 14 in-house brands includes VOIR, SODA and Applemints. Bonia has its namesake brand as well as Carlo Rino and Sembonia. The company is also a distributor and dealer for brands like Santa Barbara Polo & Racquet Club, Carven and Jeep. Riding high on nation’s growth A key factor for these success stories is Malaysia’s strong economic growth. The gradual shift from an agriculture- to manufacturing- and now, services-based economy has resulted in rising disposable incomes. Growing affluence and persistently low unemployment rates have, in turn, led to burgeoning consumer-driven sectors. Homegrown fashion houses like Padini, VOIR and Bonia, whose handbags and footwear are shown here, are benefiting from the country’s strong economic growth, which has resulted in rising disposable incomes. The three listed retailers have all registered rising sales over the past few years, remaining profitable even during the recent recession. Case in point, total consumption (both the private and public sectors) as a percentage of GDP rose from 54% in 2000 to 68% in 2009. The retail and wholesale trade sub-segment increased from RM39.96 billion to RM69.5 billion over the same period, accounting for 13.3% of the country’s economic activity today, up from 11.2% in 2000. In particular, the rapid rise of the middle-class is the primary driving force behind the growth in domestic consumption. It is no surprise then that most of the local fashion houses are focused on this market segment. The three retailers listed on Bursa Malaysia — Padini, Bonia and Voir — have all registered rising sales over the past few years. Sales grew even during the recent global downturn, underlining the relative resilience in domestic consumer spending. Bonia’s sales grew from RM192 million in FY June 2005 to RM315 million in FY10, which is equivalent to an annual compounded growth exceeding 13%. Over the same period, Padini expanded at an even faster pace of nearly 17% per annum. Voir, the smallest of the three, saw sales expand from RM93 million in 2004 to RM150 million last year. All three companies remained profitable through the worst of the recession. Cautiously optimistic going forward Having said that, some retailers are wary of potential speed bumps ahead. The gradual removal of subsidies has led to rising prices and the failure of wages to rise in tandem will result in lower purchasing power. Recent government proposals to curb household debt and speculation in the property sector as well as the impending imposition of the goods and services tax (GST) are likely to further dampen consumer consumption. That explains why Chan Kwai Heng, executive director of Padini, is adopting a cautious stance. “My personal feeling is that Malaysian consumers want to see if growth is sustainable before (deciding what to do with their disposable incomes),” he said. Chan added that recent announcements such as the curb on credit card availability, real estate cap on loan-to-value ratio proposal, subsidy removal and GST were sending mixed signals to consumers. Nevertheless, most analysts remain relatively upbeat on the prospects for the retail sector. Indeed, all three companies are committed to expand their businesses further, be it through organic growth or acquisitions and mergers. Expansion will continue to drive growth In its last financial year ended June 2010, Padini opened six new outlets — one Vincci, two Vincci+, a Padini Concept Store and two Brands Outlets. Going forward, the company intends to focus on the Brands Outlet line, which is targeted at value-conscious customers. There are plans to add three Brands Outlet stores this year, one of which just opened in Sunway Pyramid this week. The company expects to lay down some RM5 million for capital expenditure in FY11. Bonia too has made moves to widen its primarily middle to upper-middle class market. In the past one to two years, the company has introduced more affordable and value-for-money brands such as Valentino Rudy, CR2 and CR Xchange, in response to the global downturn. Similarly, VOIR is also keen to broaden its market reach by expanding its range of products targeting different segments of the market, in addition to new outlets. “Going forward, we see an increasing trend towards the medium-end with a slight bias towards a medium-high market,” said Ham Hon Kit, executive director of VOIR Group of companies, noting the population, improved economy and government plans as contributing factors. “In a medium market you have a fair share of the population. Recently, we launched our sub-label Noir, which delivers to the medium-high segment,” said Ham, who described VOIR largely as a medium-market brand. He expressed the hope that VOIR would offer Malaysian consumers an extended product range in the next three years. “Additional fashion and lifestyle products could be introduced through brand extensions, new, acquired or international brands,” said Ham, who stated that if VOIR moved towards the upper market it would be via these channels. The company has budgeted some RM8 million to RM10 million for expansion next year, including two to three new “VOIR Gallery” — its multi-brand store — and two to three single-brand outlets. Additionally, VOIR has diversified into the food & beverage sector, which it views as a higher margin business. The company intends to add up to eight new Garden Lifestyle Store and Cafés to its current portfolio of two, which are located in suburban malls 1-Utama and The Curve. If all goes as planned, VOIR expects the Cafés to contribute up to 10% of its revenue next year. Tapping regional markets Having cornered a slice of the local retail market, Malaysian fashion houses have turned their attention to the exports market, another driver of growth. Bonia appears to have taken the biggest stride so far. More than 28% of the company’s revenue is derived from abroad where it has 70 boutiques, including Singapore, China, Taiwan, Thailand, Vietnam, Indonesia, Japan, Saudi Arabia and Syria. It began manufacturing bags and wallets at its China plant for the country’s domestic market end-2008. Recently, Bonia announced the acquisition of a 70% stake in Singapore-based Jeco Pte Ltd for S$28 million. Jeco is the licensee for Pierre Cardin leather goods in Singapore and the master licensee for Renoma in Singapore, Malaysia and Indonesia. It is also the sole distributor of Bruno Magli products in Singapore and the owner of trademark and brand representative of Braun Buffel in Asia-Pacific. “The acquisition is quite a profitable one. It will immediately impact earnings given the size of the stake,” an analyst said. As for Padini, overseas sales account for some 10% of Padini’s revenue currently. The company’s products are sold in retail stores and counters operated by licensees and dealers in various countries. This strategy enables it to push greater volume while limiting capital commitment and risks exposure. How the stocks performed Bonia is the largest gainer with a 59% increase in share price to RM1.67 per share from RM1.05 at the start of the year. The company posted a 61% rise in net profit to RM33.23 million from RM20.61 million for the 12-month period. Four research houses have recommended a buy on the stock since September, with an average target price of RM1.91 per share. Shares for Padini rose 32% to RM4.98 from RM3.77 over the same period. In its 12-month results, Padini also announced a 23% rise in net profit to RM60.74 million from RM49.53 million in FY09. Since September, two research houses have issued buy calls on the stock, with an average target price of RM4.83. VOIR, the smallest of the three, fell slightly short of the benchmark FBM KLCI. The stock gained just 5% to 72.5 sen from 69 sen at the beginning of 2010. For the first six months of the year, VOIR posted a 109% y-o-y increase in net profit to RM1.91 million from RM900,000 in the previous corresponding period. In an August report, the sole research house covering VOIR recommended a “hold” and a target price of 61 sen. Related stories: VOIR looks to diversification and brand extension Bonia known for its quality Padini gets its concept right Retailers doing well on strengthening consumer spending This article appeared in The Edge Financial Daily, Oct 11, 2010.