Jumbo Group - DBS Research 2016-11-28: On the growth path

Jumbo Group - DBS Vickers 2016-11-28: On the growth path JUMBO GROUP LIMITED 42R.SI

Jumbo Group - On the growth path

  • 4Q16/FY16 earnings in line on better margins.
  • Earnings growth to be driven by better operating leverage, outlet expansion.
  • Maintain BUY and S$0.77 TP.


Maintain BUY and TP of S$0.77. 

  • We maintain our BUY recommendation and TP for Jumbo Group (Jumbo) at S$0.77. 
  • We project earnings to grow by 13 and 19% in FY17-18F to S$21m and S$24m respectively. We anticipate growth to come from outlet expansion especially in China. Successful franchise and JV negotiations will add to growth going forward as well. 
  • The stock trades at below 20x FY17F PE. We continue to like Jumbo for its rapid growth in China, close to 30% ROE in FY17- 18F, relatively higher margin than peers, cash generative business, and strong net cash balance.


4Q16 (FYE Sep) net profit in line. 

  • Headline net profit for 4Q16 more than doubled to S$4.4m as better than expected margins made up for revenue (S$33.5m, +28%y-o-y) which was slightly below expectations. 
  • Gross margin was strong at 67% for 4Q16 while EBIT margins rose to 14%, contributed by a better sales mix. 
  • Management proposed a final DPS of 1 Sct and special DPS of 0.7 Sct, representing 70% dividend payout.


Outlook remains strong. 

  • Our FY17-18F earnings forecasts are largely unchanged. 
  • We expect revenue to be driven by more store openings in the medium, especially in China. In Singapore, there will be scope for 1-2 more outlets, with one Jumbo Seafood outlet to be located in the business district. Jumbo is also negotiating for franchise and JVs in other parts of Asia. These should drive robust earnings growth of c.20% over the next two years.


Valuation

  • Pegged to peers’ average of 23x FY17F PE. Jumbo is trading at 20.1x FY17F PE, below peers’ 23x FY17F PE. 
  • We peg our valuation of Jumbo at 23x FY17F PE, in line with the peers’ average to derive our target price of S$0.77.


Key Risks to Our View

  • Apart from operational risks, we see failure to deliver growth in China as a key risk to our earnings growth projection. 
  • We primarily view Singapore’s business as stable while the bulk of the growth is driven by the China business.




Alfie Yeo DBS Vickers | Andy Sim CFA DBS Vickers | http://www.dbsvickers.com/ 2016-11-28
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.770 Same 0.770






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