Gloomy quarter. In 1QFY6/12, FJ Benjamin (FJB) reported revenue of SGD94.3m (-1.7%), accompanied with a sharp decline in net earnings to SGD2.3m (-37.3%), on the back of Chinese tourists cutting back on spending. While FJB remains cost vigilant, its continued growth may come at a price. We believe current valuations are still a tad rich compared to retail peers in the region, thus keeping our Hold recommendation unchanged.

Consumer spending slows in North Asia. Consumer spending slowdown was the most apparent in North Asia. Even with the help of China’s Golden Week, retail sales in North Asia declined 13% YoY to SGD18.9m, of which Hong Kong sales dropped 18%. Regionally, timepiece sales were lowered 18% YoY to SGD30.4m, while fashion sales rose 9% YoY to SGD63.6m. Operating margins were squeezed this quarter, due to higher rental and staff costs.

Growth may come with a price. Management remains committed in executing store number growth of 7.8%, with a target to hold 206 stores by year-end. While operational cash flow has improved, we expect capex to remain heavy for FY13, which may affect its ability to pay dividends.

Upside could be lurking in VNC. Fast fashion brand, VNC, may be essential to achieving positive topline growth in Indonesia next quarter. First store will be opened next month, followed by 2 more in the next 12 months. The management is actively seeking out new brands to add to its portfolio, and cited that FJB is under negotiations for 2 lifestyle and luxury brands.

Valuations fair. Current valuations appear fair against fashion and watch distributers in the region trading at historical P/E of 12.5x. In the meantime, we have adjusted our estimates 1-2% downwards to account for higher rental costs. We maintain Hold with a TP of SGD0.35, based on 14x FY6/13F P/E.

Source: Maybank Kim Eng Research - 09 Nov 2012