FY13 results below expectations, no recovery yet. FJ Benjamin (FJB) reported its full-year FY6/13 sales with a decline of 5% YoY to SGD373.4m and net profit of SGD4.4m (-68% YoY), due to a drag on sales in North Asia, particularly in the Watches segment, as well as softening consumer sentiment in Singapore. Excluding a one off gain on sale of investment properties, results were still below our bearish estimates. On a more positive note, FJB has declared a 0.5cts final dividend, implying a dividend payout of 64%. We maintain our SELL call, in light of poor consumer sentiment in particular countries to continue to hamper on FJB’s earnings over the next year.

Poor sentiment persists in North Asia and Singapore. North Asia fell by 26% in Hong Kong and by 47% in China. While Indonesia and Malaysia saw growth in retail sales of 13% and 8% respectively, Singapore sales have remained poor on the back of strengthening currency and weak tourist spending. The management has highlighted operations in Singapore have become more difficult to handle due to rising business costs, weak store traffic and expects this to persist. While gross margin has maintained flat at 2.7% (-0.2ppt YoY), operating margin was hampered by increasing operating costs such as labour and rental, and fell by 3ppt YoY to 2%.

Business still goes on with heavy costs. Year-to-date, FJB has secured three new franchise brands, Tom Ford, Superdry and Valextra, affirming its franchising distribution strength in SE Asia. With a range of lifestyle and luxury retail brands joining FJB’s portfolio, FJB is expected to have a net opening of 14 stores across the region, bringing its total store count to 235 stores (212 stores in FY6/12). Bulk of the openings will be in Indonesia (+9), Malaysia (+6), and Singapore (+8). We are concerned on FJB’s wakening balance sheet unable to support the aggressive store openings. We expect net gearing to continue to soar from 0.53x, with continuously heavy capex and increasing operating costs weighing down on earnings.

Maintain SELL. We have lowered our earnings estimates further by 15- 22%. Maintain SELL with TP of SGD0.21 now pegged to 1x P/B.

Source: Maybank Kim Eng Research - 27 Aug 2013