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Jumbo Group Ltd - Maybank Kim Eng 2016-03-03: Leveraging Up In China

Jumbo Group Ltd - Maybank Kim Eng 2016-03-03: Leveraging Up In China JUMBO GROUP LIMITED 42R.SI 

Jumbo Group Ltd (JUMBO SP) - Leveraging Up In China 


Reiterate Buy 

  • We remain bullish on Jumbo, especially as all indications are for a surging China business this quarter. 
  • Our analysis of its IAPM outlet suggests strong operating leverage that should increasingly be in Jumbo’s favour and should show up in the numbers soon. 
  • Despite two new outlets, China only had a small loss in 1Q16. 
  • With strong sales so far in 2Q16, it could be in the black as soon as this quarter. 
  • Reiterate BUY on Jumbo, with TP of SGD0.58, based on a blended PE/DCF methodology. 

Operating Leverage In Jumbo’s Favour 

  • We expect operating leverage to work to Jumbo’s advantage in China in coming years. 
  • We estimate IAPM’s operating leverage to be 3.3x. In other words, every 10% rise in sales will lead to 33% higher profits. 
  • All indications now are of a buoyant topline. As sales ramp up, the high operating leverage will lead to rising profits for every incremental dollar of sales. This means Jumbo’s potential to outperform is very high. 

China Could Be In The Black This Quarter 

  • Despite having two brand-new outlets, China only posted a small loss of c.SGD100k in 1Q16 as IAPM alone was able to almost cover their start-up costs. 
  • With management reporting strong sales over CNY and most critically — even after CNY ended — for all three outlets, China could turn profitable as soon as 2Q16. This will be a key catalyst to look out for when they report 2Q results. 

IFC Outlet Delivering On Bullish Expectations 

  • Management reported that the latest IFC Mall outlet in Pudong, which opened before CNY, is full-house even post-CNY and on weekends as well. More critically, average bill per diner at this outlet is CNY368, 10% higher than IAPM Mall and 35% higher than Raffles City, as we expected. 
  • We are encouraged by IFC’s direction and continue to expect a relatively shorter time to profitability for it.


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/ 2016-03-03
Maybank Kim Eng SGX Stock Analyst Report BUY Initiate BUY 0.58 Same 0.58


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