Jumbo Group - Banking on Overseas Markets for Growth
4Q16 within; maintain BUY, TP SGD0.78
- 4Q16 core EPS was in line, with full year at 98% of our FY16E.
- Maintain BUY and TP of SGD0.78, expecting catalysts from franchise & JV opportunities.
- Following an 18% earnings jump in FY16, we forecast 22%/12% growth for FY17-8E. We expect continued upside overseas, especially from China. At 21x FY17E P/E vs peers’ 23x, we see good value for a stock that generates 25% ROE with an attractive franchise and growth strategy.
- Our TP is still based on blended 21x FY17E P/E and DCF (WACC 7.4%, LTG 1%) to incorporate its longer-term growth prospects.
Margins & dividends beat
- FY16 core EPS jumped 18% YoY. Positives were:
- a higher-than-expected DPS of 1.7 cts, which included a 0.7 ct special and beat our DPS forecast of 1.3 cts; and
- record 67% gross margins in 4Q16 vs its historical 63- 64% on a better sales mix (more seafood) and lower initial costs of new restaurants in China.
- China results continued to improve, and contributed 15%/18% to 4Q16/FY16 revenue.
- Singapore sales were up 4% in FY16 but down 4% YoY in 4Q due mainly to the Zika virus.
Home-ground advantage; overseas growth angle
- FY16 confirmed two things.
- First, that Jumbo’s earnings in Singapore can be resilient even in times of belt-tightening due to effective market positioning and management of labour, rental costs etc.
- Second, overseas expansion and growth potential from overseas markets are intact and now include franchise and JV possibilities.
- We expect more concrete developments in this area to provide catalysts in coming months.
Valuations not matched to outlook yet
- We are looking for c.20% EPS CAGR in FY17-20E even without franchise contributions. We have only modelled in two new restaurants for FY17 in Shanghai and Singapore.
- Jumbo trades at 21x FY17E P/E, below its regional peer average of 23x.
- Risks to our forecasts include failure to deliver the expected outlet expansion on the schedule that we expect, as well as weakness in CNY which could affect its China contributions upon translation.
- Better-than-expected Singapore and China sales, especially from new outlets.
- Lower-than-expected food and staff costs that could lead to better-than-expected margins.
- Expectations of higher dividends or articulation of a dividend policy.
- Any changes in China’s food safety laws that could affect China’s import of mud crabs.
- Shortage of critical ingredients for its signature dishes: crabs, other seafood.
- Epidemics or health scares that can damage its reputation or cuisine eg mass food poisoning, salmonella.