JUMBO GROUP - UOB Kay Hian 2015-11-25: A Chilli-Hot Consumer Play

JUMBO GROUP LIMITED 42R.SI

JUMBO GROUP (JUMBO SP) - A Chilli-Hot Consumer Play

Jumbo with its strong brand equity, is a key ambassador of Singapore’s popular chilli crab on a global level.
Riding on its strong brand equity, Jumbo has enjoyed success in its initial entry into the Chinese market.
As Jumbo expands its network of stores in China, investors can look forward to strong earnings growth and robust cashflow generation from this chilli-hot consumer play.

Of note, Jumbo Group (Jumbo) had one of the strongest showing in terms of earnings growth, return on equity and net margins among local peers in FY14.
Jumbo has the highest FY16F return on equity of 24% vs its peers average of 15%.

Established in 1987, Jumbo is a household name in the local restaurant industry.
As a key ambassador of Singapore’s wildly popular chilli crab to the international community, Jumbo has even attracted the likes of international Hollywood star, Reese Witherspoon during her recent visit to Singapore.
Jumbo was also listed as one of the 50 iconic attractions to visit in Singapore by Tripadvisor for Singapore’s 50th anniversary.

As a result of its strong brand equity, Jumbo seafood is considered a “dining destination” for consumers, meaning that Jumbo does not rely on impulse foot traffic (diners pre-plan their trips to Jumbo).
As a result, all Jumbo Seafood outlets are not located at shopping centres where rental increases have eroded the margins of its peers.
To manage labour issues, Jumbo manages a pool of casual labour (enticing them with bonuses and flexible working hours), has a central kitchen and employs technological upgrades, such as the usage of iPads to improve productivity. As such, rental and labour as a percentage of total costs have remained stable over the last few years.
Of note, Jumbo enjoys higher profitability ratios of 10- 11% as compared to its peers of about 5% in the local restaurant segment.

Sales transactions are usually conducted on a cash basis. While Jumbo may extend credit terms to corporate clients such as tour agencies, contributions from these clients form less than 1% of total sales. As such Jumbo has been able to generate very strong free cash flow of S$4m-13m from FY12-14.
Management has stated their intentions to distribute at least 30% of its profits in FY16 and FY17, and this translates to a potential dividend yield of 2%

Despite its limited operating history in China (entered the market only in late 2013), we noted that Jumbo’s first outlet at iAPM, Shanghai, was ranked among the top five restaurants in the mall by consumers according to Dianping.com.
Of note, we estimate that the outlet at iAPM has turned in positive cashflow in six months, recouping the group’s investment just two/three years into its operations.
With the imminent opening of the third outlet in Shanghai in Jan 16, Jumbo has identified China as its key engine of growth, and we believe there may be plans to increase the number of outlets to 10 in the next 3 to 5 years.

Andrew Chow CFA UOB Kay Hian | Brandon Ng Chenhao CFA UOB Kay Hian | http://research.uobkayhian.com/ 2015-11-25

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