gsg_stock discussion

Stockwatch- FJ Benjamin, $0.87

Goldman Sachs initiate coverage on FJ Benjamin, target price $1.10

Report dated 3 April 2007

Making a come-back; initiating coverage with Buy

Source of opportunity
FJ Benjamin (FJB) has restructured for better profitability by exiting unprofitable brands and de-leveraging its balance sheet. This high-end fashion retailer is now embarking on a rapid store expansion plan which could grow retail space three-fold over FY2006-FY2008E. An underresearched stock, we believe it also offers rare exposure to discretionary consumer spending in Singapore which we estimate accounts for 60% of group revenues. We initiate coverage on the stock with a Buy rating and 12-month price target of S$1.10/share, offering 54% potential upside.

Catalyst
1) Strong earnings growth – our forecasts indicate a 2 year FY2006- 2008E fully diluted EPS CAGR of 33%; 2) Capital management – capex requirements are minimal, and we believe the company may return excess cash to shareholders (S$0.22/share net cash at FY2007E); 3) New
earnings accretive brands could drive potential earnings upside.

Valuation
Our S$1.10/share 12 month price target is based on a SOTP valuation valuing FJB’s retail business at 16X FY2008E P/E. In our view, this is reasonable compared to FJB’s recent 7X-17X trading range, the Singapore market average of 16X and the regional retail (apparel) sector average of 18X.

Key risks
1) Earnings disappointment – FJB has an inconsistent profitability track record, and new brands may disappoint; 2) Share price outperformance and profit taking from warrant conversions, 3) Franchise agreements may potentially be re-called by brand owner – but we see this as unlikely as the brand principals are more likely to focus their attention on larger Asian markets like China.

posted by gsg @ 10:21 PM