Core results came in below expectations. FY12 PATMI of S$16.4m appeared to exceed our estimates of S$11.8m, but this was largely boosted by FV gains on investment  properties  (S$7.1)  and  derivatives  (S$0.2m).  Excluding  that,  PATMI would  have  fallen  to  S$9.1m.  Revenue  grew  by  9%  to  S$289.9m,  with  gross margins  holding  strong  at  51%  but  earnings  were  ultimately  dragged  down  by escalating  operating  costs.  We  are  maintaining  our  estimates  for  FY13/14.  We expect  gradual  improvement  in  margins  as  the  Australian  and  China  operations gradually reduce their losses and return to the black. The Group declared a 1S'' final  dividend  and  a  1S''  special  dividend,  exceeding  our  forecast  of  1.4S''. Maintain BUY with TP of S$0.74, pegged at 15x FY13.

Rising cost pressures, coupled with operating losses from Australia in-line with expectations. Revenue for FY12 grew by 9%, largely driven by higher sales from  core  markets  of  HK,  Malaysia  and  Singapore  and  also  contribution  from Australia which has been consolidated since Feb12. Excluding Australia, revenue would  have  grown  by  a  marginal  5%.  As  forecasted,  the  Group  experienced escalating  costs  in  terms  of  rental  and  salaries  in  its  core  markets  as  well  as incurred operating losses in Australia which dragged EBIT lower by 22% YoY.

Australia  contributed  S$7.8m  sales  in  4QFY12.  Australia  contributed  S$7.8m to  the  4QFY12  topline,  representing  11%  of  Group  revenue. We  note  that  since its  inception  into  EYS  in  Feb12,  it  has  contributed  S$11.2m  in  sales  or  4%  of Group  revenue.  Management  has  seen  gradual  improvement  in  sales  on  a month-on-month  basis  from  A$1m  to  A$3m  currently.  However,  we  still  expect Australia to remain unprofitable in FY13 and to turnaround only in FY14.

Maintaining estimates; Reiterate BUY. We maintain our estimates, expecting a 36%  and  13%  growth  in  earnings  for  FY13/14  respectively  to  S$22.3m  and S$25.1m respectively.  At last close, stock is trading  at 13x FY13  P/E, offering  a yield of 3%. Our TP of S$0.74 is pegged to 15x FY13 P/E.

Earnings boosted by FV gains, exceeding expectations. FY12 PATMI fell by 35% YoY to S$16.4m  but  still  exceeded  our  estimates  of  S$11.8m.  This  was  largely  due  to  fair  value gains  of  S$7.1m  from  investment  properties  and  S$0.2m  from  derivatives.  Excluding  these gains, PATMI would have fallen to S$9.1m.

Escalated  costs  from  rising  rents  and  losses  in  Australia  dragged  on  earnings.  As expected,  FY12  operating  profits  fell  by  22%  YoY  to  S$24.4m,  due  to  escalated  costs pressures arising from rentals and wages as well as operating losses incurred in Australia.

Softer retail sales. Retail sales grew by 5% YoY to S$231.3m across the Group, including sales  from  Australia  since  Feb12.  Excluding  Australia,  sales  for  4Q12  actually  declined  by 6% YoY while for FY12, we see a marginal 2% dip. This reflects some softness in the retail market  currently.  We  also  note  that  the  Group  has  been  forced  to  shut  down  three  retail outlets in Hong Kong in light of escalating rental costs.

Wholesale  sales  grew  at  a  healthy  37%  YoY.  There  was  a  healthy  37%  YoY  growth  in wholesale sales to S$38.3m, which largely stems from Hong Kong. These  wholesale sales involve  Eu  Yan Sang branded products to stores like Guardian and Watsons which help to raise brand awareness and customer reach.

Stable  growing  sales  from  TCM  clinics.  Sales  at  its  TCM  clinics  continue  to  register healthy  sales  growth,  growing  8%  YoY  to  S$3.1m  in  FY12.  Growth  in  Singapore  was stronger compared to Hong Kong as the proportion of the population turning to TCM as an alternative to western medicine improved.

Australia contributed S$7.8m sales in 4QFY12. Sales from Australia contributed S$7.8m to the  topline,  representing  11%  of  Group  revenue.  Since  its  incorporation  into  EYS  in  Feb12, management  has  seen  sales  at  its  Australian  outlets  improve  on  a  month-on-month  basis from A$1m to A$3m currently. It has contributed S$11.2m in sales since Feb12, representing 4% of total Group revenue.

Hong  Kong  remains  largest  revenue  contributor.  Hong  Kong  remained  the  Group's largest  revenue  contributor  despite  the  closure  of  three  stores,  contributing  10%  of  total Group sales for FY12.

FY12: +26 retail outlets & 1 clinic. The Group expanded at its fastest pace ever in FY12 in terms  of  store  count.  The  Group  added  a  total  of  26  retail  outlets  and  one  TCM  clinic, bringing the total network to 211 retail outlets and 26 TCM clinics at end FYE Jun 2012.

+88  outlets  from  Australia.  The  acquisition  of  the  Australian  business  in  Feb12  saw  the inclusion  of  24  owned  outlets  and  64  franchised  outlets  to  the  Group's  network  as  at  FYE Jun 2012.

+12  outlets  in  China.  EYS  was  particularly  aggressive  with  expansion  in  China,  upping from four outlets to 16 outlets within the span of a year.

The  stock  has  been  trading  at  an  average  of  14x  PE  over  the  past  three  years.  Our  TP  of S$0.74 is pegged to 15x FY13 earnings. The slightly higher premium is justifiable seeing EYS has embarked on a new phase of expansion into Australia.

Source: OSK