Sunday, August 24, 2008

FJ Benjamin FY08 results

FJ Benjamin released its full year results for FY08 recently. I’m not interested in this company though I’m interested in the business. I followed this company since a number of forum friends had or once had vested interest in this company, so I’m doing it for the intellectual challenge that it might pose.

The press release as usual gave a very clear summary of how FJ ben is doing. The headlines mentioned about the 33% increment in turnover year on year, while the net profit (excluding exceptional items) went down 17%. Dividend of 2 cts per share is also given. I’ve learnt not to rely so much on press release or any media statement but to do more detail and independent work on the financial statements itself.

Here are the key figures for FJben:

Net margins(extraord. gains)-------4.3--------------------8.3
Net margins(no extraord.gains)----4.3--------------------6.8
Total debts to equity (%)-----------91.4------------------52.9
Current ratio---------------------------1.7--------------------2.5
Quick ratio-----------------------------0.93------------------1.73
EPS (SGD)--------------------------0.0261---------------0.0507

My take:

1. Big drop in the net margins while gross margins (not shown) remained almost constant. Two items caught my eye as I try to decipher what made the net margins dropped so much – rental of premises and depreciation of property, furniture, fixtures and equipment. The former increased by 59% while the latter increased by 80%. Why is there a big increase in depreciation? Rental premises increment is understandable as they opened 33 new stores in FY08. It sucks to have higher turnover of 33% yet net profit dropped by 31%, in my opinion.

Again, the low net margins make me rethink about the kind of business that FJben is involved. Im always amazed that the net margins of around 4% is not that different from Popular. Even excluding extraordinary gains in FY07, the net margins dropped from 6.8% to 4.3% in FY08.

2. Current ratio dropped in FY08, mainly due to a drop in cash and cash equivalents. The wide difference between current and quick ratio means that the bulk of current assets are held in inventories. Fashion is fickle, so it might not be such a good idea to look at current ratio but to look at quick ratio instead. FJ ben increased both current and non-current liabilities in FY08. Combined with the reduction in equities, this raised the total debt to equity ratio from 52.9% to 91.4%. I’m a little more worried about their short term liquidity problem rather than their long term problems. I think that their increased inventories could be due to more stores opening or that they have problems selling. Since I’m a brand idiot, the less I talk about their sales, the more intelligent I’ll look. Let’s move on.

3. ROE is almost constant from year to year. But a closer examination using dupont analysis suggests the underlying fundamentals contributing to the ROE had changed.

Net margins(%)------4.32---------------------8.33
Asset turnover--------1.29---------------------0.85
Financial leverage----1.91---------------------1.53
ROE (%)--------------10.6---------------------10.8

Net margins drop from FY07 to FY08 is compensated by the higher asset turnover and higher financial leverage, causing the ROE to remain almost the same. This gives me an impression that FJ ben is having higher turnover but is not translating into higher profit due to costs. If you ask me, the ROE of FY07 is fundamentally stronger than in FY08, despite the ROE being almost the same.

4. EPS dropped from 5.07 cts in FY07 to 2.61 cts in FY08. This is inclusive of extraordinary gains of around SGD 3.8 million in FY07. Stripping that off, the EPS in FY07 is around 4.16 cts per share. Moving forward, with the world teetering on the threats of recession, it’s hard to foresee earnings figure improving in next year. There is always mention of IR and Ion orchard contributing to higher sales, but for me, let the performance of these catalysts speak for themselves. I’ll rather by pessimistic about their future results and be pleasantly surprised than be optimistic about it and get a rude shock.

Here are the EPS and ROE figures in past FY:

ROE (%)-------------2%----------3%---------6%----------11%--------11%------11%
EPS (cents)----------0.52--------0.70--------1.50--------3.53--------5.07-------2.61

Valuation and price

Based on EPS of 2.61 cts per share and last closing price of $0.260, the PE is 10x. They gave a total of 2 cts per share dividend in FY08, thus giving a current dividend yield of 7.7%. This however, represents a payout of around 77% of EPS and the natural question of sustainability of the dividend arises. I'm not sure about their historical payout ratio though.

Looking at their historical PE, we can see a high historical PE of 34x and a low of around 5x. So, if we price FJben at a low PE of 5x, we'll get a price based on FY08's earnings of $0.130.

If we apply old Ben's strict net current asset value (using current assets - total liabilites then divide by shares outstanding), we'll get $0.140.

I calculated the NAV, it's 0.245 cts per share. But to be conservative, let's value the inventories at 50% of it's balance sheet value (why? I think 50% sales at Guess or Raoul would be very nice!), I'll get a bastardised NAV of $0.165 there. At this price, the PE is around 6x. Dividend yield will rise up to 12%. Yum yum :)