TP reduced from S$0.48 to S$0.33
Expect weaker consumer demand
• Turning cautious on mid-term outlook even though 1Q12 results in line
• FY12F/FY13F earnings cut by 11%/12%
• Downgrade to Hold, TP lowered to S$0.33
Turning cautious on mid-term discretionary spending. Consumer sentiment is expected to weaken, hence we are turning cautious on FJB’s mid-term outlook. As a regional mid-to-high end fashion and apparel distributor and retailer, we believe FJB will be sensitive to changes in consumer demand. The 2012 outlook for GDP growth globally is now largely lower than when we first initiated coverage of FJB in August this year. 1Q12 results in line but outlook is weaker.
1Q12 results met our expectations, supported by contributions from HK timepieces. We will be keeping tabs on FJB’s performance over the seasonally stronger 2Q12 (Christmas shopping and year-end holiday season) as well as retail sales generally, as an indicator to 2H12’s performance. We believe consumer sentiment will weaken on expectations of slower economic growth, and we expect discretionary spending to be affected. Management is targeting for 190 stores by FY12F vs 165 currently. However, we believe this to be aggressive.
FY12F/FY13F earnings lowered by 11%/12%. Given the poorer regional economic outlook, we are reducing our earnings expectations for FY12F/FY13F by 11%/12%.
Downgrade to Hold, TP reduced from S$0.48 to S$0.33. The stock currently trades at 11x FY12F PE. Given the lowered earnings estimates, TP lowered from S$0.48 to S$0.33 based on 12x FY12F earnings, in line with peer average. Downgrade to Hold.
Turning cautious on mid-term outlook…
Expect weaker consumer sentiment and cutback in discretionary spending on lower regional GDP growth expectations. Consumer sentiment is expected to weaken over the mid-term. As a regional mid-to-high end fashion and apparel distributor and retailer, we believe FJB will be sensitive to changes in consumer demand. The 2012 outlook for GDP growth globally is now largely lower than when we first initiated coverage of FJB in August this year. The Eurozone crisis and lackluster US growth will continue to affect international demand for goods and services from the Asia Pacific. Our 2012 GDP forecasts for various economies are now largely lower than our projections made in August this year. With a less positive outlook than before for 2012 and beyond, we are cautious regarding FJB’s prospects.
…despite 1Q12 results meeting expectations
Met our expectations for 1Q12. 1Q12 results met our expectations. Revenue rose 16% y-o-y to S$96m while earnings grew 11% to S$3.5m.
Revenue growth contributed by HK timepieces. Revenue growth was across Singapore, HK, Malaysia and China, in particular higher volume orders of high value timepieces from existing timepiece customers in HK. The newly-opened Goyard store in HK in February this year also contributed to sales growth. Fashion saw moderated growth due to cessation of operations in Thailand.
Improved operating margins on better cost management. Gross margin was maintained at 44%. Operating profit rose 168% to S$6.3m as cost to revenue ratio fell to 38% from 41% in 1Q11.
Net gearing increased to fund expansion. FJB’s net gearing increased from 6% as at end-June 11 to 25% as of end-Sept 11. This was mainly due to S$8.5m five year interest-bearing loans granted to the group for expansion.
Management is still looking at 190 stores by FY12F, we believe this to be aggressive. FJB currently has 165 stores (including Indonesia) mainly located in South East Asia. Management is looking to grow the number of stores to 190 by end of FY12F, with most of the increase to come from Malaysia and Indonesia. This means that management will have to add another 25 stores regionally. This is rather aggressive in our view and we believe near-term expansion pace may potentially be slower than management’s intention given the current economic uncertainties.
Christmas shopping season will be important in gauging consumption strength. Looking forward, we are keeping close tabs on the seasonally stronger 2Q12 (Christmas and year end shopping season), as an indicator to 2H12’s performance. Post Christmas and Chinese New Year shopping, fashion and apparel consumption could be affected on slower economic growth, in our view.
But we are taking a cautious stance on earnings sustainability
Earnings reduced by 11%/12% for FY12F/FY13F. Given the weaker regional economic outlook, we have taken a cautious stance and are therefore reducing our earnings expectations for FY12F/FY13F by 11%/12%.
Key Risks
Consumer sentiment. We see consumer sentiment and therefore demand as the key risk to our forecasts under current market conditions. Unlike luxury or low-end fashion brands, we believe mid to high end brands are most sensitive to changes in consumer sentiment. We believe marked changes from the current outlook and discretionary spending patterns are likely to cause deviations to our estimates.
Valuation
Downgrade to HOLD, TP reduced from S$0.48 to S$0.33. The stock currently trades at 11x FY12F PE. We are taking a more cautious view on regional consumer sentiment and demand following lower 2012 GDP growth expectations than before. We have also re-pegged our PE-based TP to 12x, in line with peer average. TP is thus revised from S$0.48 to S$0.33. Downgrade to Hold.
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