Jumbo Group - UOB Kay Hian 2016-10-10: Opens A New Non-Seafood Outlet; Riverside Expansion Completed

Jumbo Group - UOB Kay Hian 2016-10-10: Opens A New Non-Seafood Outlet; Riverside Expansion Completed JUMBO GROUP LIMITED 42R.SI

Jumbo Group - Opens A New Non-Seafood Outlet; Riverside Expansion Completed

  • Jumbo opened a new bak kut teh outlet in RWS and completed the expansion of its Riverside outlet. 
  • We see potential JV and franchise opportunities down the road which would increase its brand equity and provide recurring income streams should these ventures materialise. 
  • There was a slight slowdown for a week or two due to the Zika panic in Singapore but business has returned to normal as fears of a Zika outbreak have subsided. 
  • Maintain HOLD and DCF-based target price of S$0.60. Entry price: S$0.54.


WHAT’S NEW


Opens fifth Ng Ah Sio Bak Kut Teh outlet. 

  • In line with our view that new outlets this year would be non-seafood outlets, Jumbo Group (Jumbo) has expanded its bak kut teh footprint in Singapore with the opening of a new Ng Ah Sio Bak Kut Teh outlet at Resorts World Sentosa (RWS). The new 1,600sf outlet is located in RWS’ popular gathering spot, The Forum. 
  • The outlet boasts technological features such as self-ordering systems with the aim of generating more cost savings for the group by reducing the outlet’s manpower needs by about 30%. The outlet employs only eight personnel and we believe this concept could be rolled out to the other Ng Ah Sio Bak Kut Teh restaurants and other concepts under the Jumbo umbrella such as J Café. This would go a long way in coping with rising manpower costs. 
  • Our channel checks indicate that the new RWS outlet has received a positive response, with it seeing long queues and the majority of customers being foreign tourists.

Completion of Riverside expansion. 

  • Jumbo has increased its seating capacity from 300 to 450 by leasing an additional 3,500sf of space at its Jumbo Seafood (Riverside) outlet. Some 150 seats have been added to the second floor of the outlet and include five VIP rooms with a view of the Singapore River and nine tables in the main hall for corporate meals and events. This will cater to the needs of corporate customers, given the outlet’s proximity to the Central Business District.

Potential JV and franchise opportunities moving forward. 

  • Jumbo has indicated its intention to continue to explore suitable opportunities through acquisitions, JVs or strategic alliances with parties who can strengthen the group’s market position. 
  • We take this as an indication that Jumbo intends to explore franchising opportunities in the region to leverage on its strong local brand equity. This would create recurring revenue streams through franchise fees and percentage of sales revenue from franchisee partners. 
  • We expect franchising opportunities to come from Vietnam which has a coastline spanning over 3,000 km with aquaculture farms both inland and out in the sea. Vietnam’s seafood sector employs in excess of 5m people and the value of Vietnamese seafood exports was about US$5.8b in 2015. Other markets could include Indonesia and Thailand.


STOCK IMPACT


Forecast for outlet openings maintained. 

  • We maintain our view that FY17 will see two new Jumbo outlets. One will be close to the Central Business District in Singapore due to the success of its Riverside outlet and the lack of presence in central Singapore, and the other outlet will be in Shanghai.


EARNINGS REVISION/RISK

  • We keep our FY16-17 core net profit estimates unchanged.
  • Key risks include a slowdown in sales in China outlets and a pandemic in Singapore.


VALUATION/RECOMMENDATION


Maintain HOLD and DCF-based target price of S$0.60. 

  • We continue to view Jumbo as a strong cash-generative consumer play with defensive characteristics. Our target price implies 21x FY17F PE, which is at a 51% premium to that for local and regional peers.
  • This is justifiable given Jumbo’s: 
    1. stable cost structure, 
    2. strong brand equity, 
    3. successful China expansion thus far, and 
    4. above-peers ROE.


SHARE PRICE CATALYST

  • Higher-than-expected store openings.
  • Franchising deals with regional companies.




Nicholas Leow UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-10-10
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 0.60 Same 0.600



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