Jumbo Group (JUMBO SP) - FY16 Results In Line; A Pleasant Dividend Surprise
- Jumbo’s FY16 results are in line with our estimate but the company proposed a dividend that surprised on the upside.
- FY16 was largely a year where Jumbo proved its ability to execute in arguably one of the largest and most competitive cities in the world.
- We look forward to FY17 as a year of further expansion in Singapore and Shanghai with a new ace up its sleeve in the form of franchising deals.
- We maintain HOLD but with a higher DCF-based target price of S$0.65. Entry price S$0.59.
FY16 results in line with our expectation.
- Jumbo Group’s (Jumbo) FY16 sales came in 11.4% higher yoy, attributable to the group’s two new Jumbo seafood outlets in Shanghai as well as an overall increase in revenue from the rest of the group’s restaurants.
- Revenue from Shanghai accounted for about 14.6% of total group revenue for FY16 vs 8.5% of total group revenue for FY15. Jumbo has proposed a final cash dividend of 1.0 S cents and a special dividend of 0.7 S cents per share. This would amount to a full-year FY16 payout ratio of 70.3%. The proposed dividend is higher than our estimate of a fullyear dividend of 1.2 S cents per share or a payout ratio of 50%.
Mall sales saw a slowdown in Singapore.
- Malls in Singapore experienced a significant slowdown due to weakness in the local economy and a drop in spending by tourists.
- We expect Jumbo’s mall exposure to be confined mainly to the JPot brand which has outlets at VivoCity, Tampines 1 and Parkway Parade.
- We estimate that Jumbo’s mall exposure through JPot currently stands at 7-8% of total group revenue.
Franchising - The story for FY17?
- Jumbo indicated that they are exploring franchising opportunities to diversify and grow. Given Jumbo’s strong brand equity and success in Shanghai, we expect no lack of suitors for the Jumbo franchise rights.
- Our channel checks indicate that initial franchising fees in the region range anywhere from S$10,000 to as high as a few hundred thousand dollars.
- Franchisees also typically pay an ongoing royalty expressed as a percentage of sales. Our channel checks indicate typical royalties to be in the range of 3-6% of annual sales.
- We have not included any contributions from franchising deals as we opt to wait for further developments before adjusting our estimates.
- We introduce our FY19 forecast and raise our FY17-18 net profit estimates up by 1.5- 2.2%. We have lowered our per pax estimate for JPot marginally to account for the slowdown in Singapore malls and fine-tuned our per pax estimates for the other outlets.
- Key risks include a slowdown in sales in China outlets and a pandemic in Singapore.
- Maintain HOLD with a higher-DCF based target price of S$0.65 (previously S$0.60). Our target price implies a 40% premium to peer average of FY17 PE of 14.3x.
- We find the premium justifiable given its superior ROE, stronger brand equity and successful execution in China.
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- Higher-than-expected store openings.
- Franchising deals with regional companies.