Jumbo Group - UOB Kay Hian 2016-01-22: Second Helping With A Higher Target Price

JUMBO GROUP LIMITED 42R.SI

Jumbo Group (JUMBO SP) - Second Helping With A Higher Target Price

Maintain BUY and raise target price to S$0.55 (from S$0.49) to reflect stronger potential sales from China and assuming the opening of another outlet in Singapore.
Given Jumbo’s strong cash flow and visible expansion plans, we maintain our upbeat view with potential catalysts from better-than-expected earnings from its outlets in China.

This note highlights our key takeaways and a review of our target price following the recent management meeting.

Jumbo has observed different customer profiles in each outlet in China.
We conducted a customer analysis by assessing the tenant list of the mall where each outlet is located to get a better understanding of the outlet’s clientele. We expect average spending per head to be the highest for the IFC Mall outlet as it attracts business executives, and at the lowest at Raffles City Shanghai outlet as the mall’s clientele are mainly young adults.
Given that Jumbo conducts regular reviews of each outlet’s menu every 2-3 months, we raise our per pax spending estimates in China by 3% as Jumbo begins customising each menu and offerings in line with its different customer profiles.

We paid a visit to Dianping.com, China’s most popular restaurant-review website, to get a feel on the reception of Jumbo’s latest IFC mall outlet. Even though the outlet is open for only about a week, it has already garnered positive reviews with an average rating of 4.5/5.

Jumbo had net cash of S$59.4m (9.3 cents/share) and free cash flow of S$10.3m as of FY15. The free cash flow yield was 3.3%.
We think the group could comfortably pay out 40% of net profits for FY16 and FY17, given its strong net cash position, low future capex requirements and free cash flow generating capability of the business. As such, we raise our dividend payout from 30% to 40%.

Jumbo is still committed to expanding its store count in Singapore but at a more cautious pace.
Our store count forecast has been revised to two new stores each in Singapore and Shanghai by FY18, up from one store in Singapore and two in Shanghai. We believe one of the new Singapore outlets could be in the central business district (CBD), given the success of Riverside Point and its lack of presence in the CBD.

We raise our FY16-17 core net profit estimates by 1.9% and 11.6% respectively to reflect an increase in average spending in the China outlets and an additional outlet in Singapore in FY17.
Key risks include:
1. poor performance in China outlets,
2. higher-than-expected rainfall to affect patronage at outlets, and
3. economic slowdown in China accelerating, impacting consumer spending.

Maintain BUY with a higher DCF target price of S$0.55 (previously S$0.49).
We raise our target price by 12.3% after increasing our average per pax spending in China by 3% and forecasting an additional outlet in Singapore in FY17.
We see further upside to our target price should the store count expansion schedule or sales exceed our projections.
Our cost of equity and terminal growth rate remain unchanged at 10% and 3% respectively.

Nicholas Leow UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-01-22

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.55 Up 0.49