Jumbo Group Ltd (JUMBO SP) - Maybank Kim Eng 2017-02-14: Awaiting Catalysts

Jumbo Group Ltd (JUMBO SP) - Maybank Kim Eng 2017-02-14: Awaiting Catalysts JUMBO GROUP LIMITED 42R.SI

Jumbo Group Ltd (JUMBO SP) - Awaiting Catalysts


In line 1Q17; D/G to HOLD for now 

  • 1Q17 in line with forecasts. Seasonally its weakest quarter, sales and NP accounted for 22% and 13% of FY forecasts. 
  • We reduce FY17 forecast by 3.5% to account for a quarter’s delay in new outlet opening in Singapore and Shanghai, due more to timing issues than anything else. 
  • With the stock now trading at 24x FY17 P/E, above regional peers’ 23x, we rate the stock a HOLD (previously BUY) until more franchise/JV deals are unveiled. 
  • DCF-TP is SGD0.75 (WACC 8.3%, LTG 3%), previously SGD0.78.
*valuation parameters and TP amended by MBKE on 15-Feb-2017.

1Q is always the seasonally-weakest quarter 

  • 1Q17 sales (+5.8% YoY) accounted for 22% of full-year forecast. 
  • Revenue wise, this is traditionally Jumbo’s weakest quarter. 
  • Reported NP rose 26% YoY, but fell 5.7% YoY after adjusting for c.700k in IPO costs in 1Q16, leading to a high base comparison. However, blended gross margin improved 1.3ppt to 64.2% due to Shanghai. 
  • There was slight cost pressure from 
    1. higher depreciation (more outlets) and 
    2. higher staff costs (for franchise business development).


Timing of new store openings in 2017 tweaked 

  • Singapore sales grew 0.5% YoY in 1Q17, recovering from 4Q16’s 4.2% YoY decline, aided by the Riverside capacity expansion but moderated by the rainy weather which reduced outdoor dining. 
  • Shanghai sales grew 53% YoY but there has been a slowdown in the growth rate, and Jumbo needs to open more outlets to rev this growth. However, plans to open two more seafood restaurants in Shanghai and Singapore (one each) have not yet been firmed up. 
  • We tweak our FY17 NP forecast down by 3.5% to factor in a slight delay. We now look for a June opening instead of April.


Franchising & JV deals still being pursued 

  • Jumbo has pursued the franchising business for the past 12 months, which has led to one deal being signed, but revenue has not yet started to flow. Franchise and JV deals in China (for seafood) and Thailand (for non-seafood) are still being negotiated. Other than the Vietnam franchise that is already announced, we have not factored in any other contributions. 
  • There is some upfront-loading of costs related to this business area, but we think they are a worthwhile investment given the low-cost growth that they can bring. However, they are only expected to materialise by mid-CY17, or a couple of months more if stretched.


Swing Factors


Upside

  • 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.

Downside

  • 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.




Gregory Yap Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-02-14
Maybank Kim Eng SGX Stock Analyst Report HOLD Downgrade BUY 0.77 Down 0.780



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