Decline in sales from Timepieces segment drags down profitability. The slowdown in the sales of luxury timepieces in 1QFY13 continued into the second quarter. On top of that, the  global  economic  slowdown  resulted  in  lower  overall  consumer  spending,  even  during the  festive  season.  Hence,  even  though  2Q  is  the  seasonally  stronger  quarter,  FJB recorded  a  YoY  decline  in  PATMI.  Management  indicated  that  business  in  North  Asia  is picking up, as China's economy continues to improve.

Improves  gross  margins  despite  challenging  business  environment.  Over  the  past seven years, FJB has always maintained gross profit margins of above 40% (except during the Global Financial Crisis when margin was 39.6%). This time is no different. For 2QFY13, FJB  improved  its  gross  margins,  from  41.9%  a  year  ago,  to  42.8%.  This  reflects  its successful  management  of  its  inventory.  Despite  the  slower  overall  sales,  management highlighted that there was no need for any write-offs or mark down of its inventory.

Lower our earnings estimates and TP. We are lowering our FY13 earnings estimates to SGD9.7m  (from  SGD14.6m),  taking  into  consideration  the  challenging  environment  in  the next few quarters. While sales in North Asia are showing signs of improvement, we are of the view that it may take a couple of quarters to revert to previous levels. As a result of the lower  earnings  estimate,  our  DCF-based  TP  has  been  lowered  to  SGD0.36  (from SGD0.39), a 12.5% upside from current levels.

Potential  for  Indonesia  market  to  continue  to  do well. Management remains optimistic of  its  Indonesia  market,  supported  by  a  growing  middle-  to  high-income  consumer  group. Management highlighted that business volume at its Indonesian associate is higher. It has launched the VNC label in Indonesia and it was well-received.  

Raoul continues to grow and progress well. FJB widened its Raoul distribution network as it now has more points of sale across the US and Europe. Through the last few years, FJB  was  able to raise Raoul's brand value and expand the business. It does not rule out the  possibility  of  establishing  another  Raoul  franchise  outlet  in  one  of  its  key  markets. Although  Raoul  does  not  contribute  significantly  to  Group  revenue  yet,  should  it  open  up more  franchise  outlets,  it  would  be  a  reflection  of  the  value  of  the  Raoul  brand  that consumers and retailers hold.

Source: OSK