FJ Benjamin Holdings

UOBKayhian on 27 Feb 2012

What’s New

• Upgrade to BUY with target price of S$0.43 (previously S$0.38), implying 28.4% upside from the current price.
• RAOUL label gains traction in the US and Europe. The RAOUL label has started to see strong acceptance in the US and Europe, with net sell-through in 2Q12 estimated to have doubled from the same period last year. The label has also begun to receive a string of celebrity endorsements and active press coverage in New York and London.
• Same-store-sales growth remains resilient. FJ Benjamin Holdings (FJB) continues to see resilient retail spending growth across most of its key operating geographies. In 2Q12, FJB’s revenue grew by 18% yoy, with same-store sales growth contributing 12 ppt to overall sales growth.

Stock Impact

• Creating scalable growth. FJB is set to enter into a new and exciting growth phase, driven by a) the introduction of new mass market fashion labels in the region, b) continued store expansion focusing on key growth markets in Indonesia, and c) the ramp-up of RAOUL sales under a highly scalable wholesale business model.
• Looking to bolster its brand portfolio. It has been five years since FJB last acquired a mass-market fashion label – GAP in 2006, and we believe that the group could take on new brands this year to expand its franchising business in the region. In our view, FJB could be looking to add a highly scalable, mass-market fashion label targeted at the growing Asian middle class.
• Ramping up Asian franchise business. FJB will continue to grow its Asian portfolio organically by increasing its store network by 10-15% every year, focusing on high growth markets in Indonesia. We believe that FJB will be able to grow franchising revenue by S$100m, or 30% in three years through organic store expansion alone, excluding further contribution from the potential growth of RAOUL and new brand additions.
• Proxy to Indonesian spending growth. In our view, FJB is a good proxy to Indonesian retail spending growth with almost half of its current stores being located in Indonesia while we estimate that a quarter of its profits could be generated from the single country by FY13. According to BMI’s estimates, Indonesia’s retail sales will grow from Rp1.55t in 2012 to Rp2.0t by 2016, driven by a fast-growing population, rising per capita incomes as well as increasing access to credit among domestic consumers.
• Highly scalable wholesale business model in the US and Europe. FJB adopts a wholesale business model for RAOUL products in the US and Europe, unlike the use of self operated retail stores in Asia. The wholesale business model is highly scalable as the group is able to penetrate thousands of departmental stores across the US and Europe via its showrooms with minimal capital expenditure. We believe that the RAOUL label could scale up and grow a few folds to become a S$50m business within three years if the brand continues to gain traction in major markets.

Earnings Revision

• Revised earnings forecast. We raise our FY12-13F revenue forecast by 2.6% and 11.8% respectively to account for better than expected same-store-sales growth and sales contribution from new brands in FY13. Correspondingly, we raise our FY12-13F earnings forecast by 4.7% and 0.5% respectively, accounting for higher than expected marketing and staff cost expected to be incurred by RAOUL in FY13.
• Contribution from FJB’s Indonesian operations is accounted for under associate and other income. We expect associate income to grow at 31.8% 2-year CAGR (FY11-13F) to S$2.6m in FY13F.

Valuation

• Upgrade to BUY with target price of S$0.43 (previously S$0.38), implying 28.4% upside from the current price.
• Our target price is pegged to 0.6x FY13 PEG, in line with Hong Kong and Indonesia listed retailing peers. We roll-over our valuation basis to FY13, and using our projected two-year EPS CAGR (FY11-13F) of 21.1%, we apply a 12.7x PE multiple to our forecasted FY13 PE of 3.4 S cents.