75% plunge in net profit. FJ Benjamin (FJB) recorded a 12% downturn in 2QFYJun13 revenue to SGD97.9m, while net profit plunged 75% to SGD1.1m. Excluding an exceptional gain on sale of an office unit, net profit would have plunged 95% to SGD0.2m. We expect weakness in North Asia sales to persist in the second half and will continue to drag on earnings. With no strong catalysts in sight, we downgrade our rating to SELL.

Timepiece segment underperform. Due to a decline in spending by PRC visitors for luxury timepieces in Hong Kong and China which persisted from a lackluster performance during Golden Week, this resulted in a 36% drop in North Asia sales. In particular, timepiece segment saw a 30% slump compare to 2QFYJun12 to SGD28.7m. Weaker HK dollar also resulted in a SGD0.8m foreign exchange loss against a SGD2.2m gain in 2QFYJun12.

Start-up losses to be expected in 2H. It appears the Group has relied on a net gain in sale of an office unit in order to breakeven this quarter. In the second half, FJB is maintaining its stride on opening a total of 20 stores, 11 of which will be opened in Indonesia. We expect start-up losses and weakness in timepiece sales continue to crimp on profitability.

Operating cash flow turn positive. On the bright side, FJB has exercised prudence in inventory stock for fashion pieces to avoid further write-offs. Operating cash flow has turned positive this quarter, and net gearing maintains manageable at 0.45x.

Highly dependent on recovery of Chinese consumer appetite. With the dire outlook on Chinese consumer spending, we halve our FY13 earnings estimates to factor in lower timepiece sales and additional costs incurred on store openings. Our target price is cut to SGD0.195 from SGD0.35, pegged to 16x FY13F P/E. Downgrade to SELL.

Source: Maybank Kim Eng Research - 06 Feb 2013