F J BENJAMIN - Retailers turn towards Asia (DMG)

BUY

Price S$0.315

Previous S$0.44

Target S$0.44

Retailers turn towards Asia

Slowdown in the West = Opportunity in Asia. As the global economy continues to be faced with uncertainties and the financial markets remain volatile, we think there could be a negative drag on consumer spending. Nonetheless, for now, the Asian consumer is expected to continue spending, supported by the still healthy Asian economy. With the slowdown in Europe and US, retail brands have been expanding in Asia. A number of retail and lifestyle brands have set up outlets in Singapore and HK recently (eg. Louis Vuitton, Van Cleef & Arpels, Abercrombie & Fitch). This is an opportunity for FJB to strengthen its brand portfolio, as it can seek to bring in retail brands keen on Singapore. Maintain BUY with TP of S$0.44.

Cautiously expanding. During the global financial crisis (GFC), FJB’s share price slid ~70%, as earnings were almost wiped out by provisions for store closures and inventory obsolescence. Operating profit fell 58%, as revenue dipped 10% over the period. Although the current global outlook is uncertain, demand for lifestyle brands is still healthy supported by a growing Asian middle class that is increasingly affluent (especially in China and India). Management is cautiously optimistic of the next few quarters. It intends to continue with its expansion plans, especially in its Indonesia with 12 new outlets, given the healthy domestic demand and relatively huge market.

Expected to remain resilient. Management had put through tight inventory management policies during the GFC, which helped FJB maintain gross margins at ~40%, despite the fall in business. As economic growth slows, even if the Asian consumer spends much less, we believe that FJB’s healthy balance sheet (5.5% net gearing at end FY11), stable cash flows and its abilities at managing inventory and costs while maintaining margins, would help it ride out the uncertainty. FJB is currently trading at 13.8x FY11 P/E. Our DCF-based TP of S$0.44 implies a forward P/E of 16x, just below its historical average of 18x. Maintain BUY.