Jumbo Group - UOB Kay Hian 2016-04-06: Resilient Core Business In Challenging Times With Dividend Upside

JUMBO GROUP LIMITED 42R.SI

Jumbo Group (JUMBO SP) - Resilient Core Business In Challenging Times With Dividend Upside

Maintain BUY with DCF-based target price of S$0.55.
Singapore sales remain resilient amid concerns of lower consumer spending.
We believe the group could pay out a higher dividend on the back of deferred capex plans and strong Chinese New Year sales.

Management update. This note highlights our key takeaways following the recent management meeting.

Jumbo has observed a small uptick in consumer spending in Singapore outlets since the start of 2016, which we partially attribute to the increase in visitor arrivals in January, and also on the back of strong Chinese New Year sales.
During Chinese New Year, Jumbo minimises the number of items on the ala carte menu and focuses instead on offering special seasonal Chinese New Year set menus. Based on our channel checks, we observed a 10-15% increase in set menu prices during the festive period.
We expect a strong 2Q16 owing to the festive season and stronger visitor arrivals for 2016.

Management has indicated to us that over the last few months, they have been seeing higher-than-usual per pax spending in the IFC outlet in Shanghai. We believe that this could be due to the 10% service charge and a clientele consisting of executives and businessmen that are less sensitive to price changes. If this trend continues, we could possibly see IFC mirroring the success of Jumbo’s first Shanghai outlet at iAPM mall.

We raise our dividend payout from 40% to 50%.
Our conviction in the free cash flow generating abilities of the company through its destination dining concept is further strengthened by the resilient spending in the Singapore and Chinese outlets amid a challenging time for F&B players due to manpower shortages and high costs of business.
Jumbo has also taken on a more prudent capex plan and indefinitely deferred its intentions to purchase a building to house the central kitchen as they have not been able to find a suitable location.
Based on a 50% payout ratio, our forecast imputes a forward FY17F free cash flow yield of 5.3% and a sustainable FY17F dividend to free cash flow of 60%.

Management has indicated to us there has been increased customer interest in holding wedding banquets at Jumbo Seafood outlets. We believe that this is due to the astronomical prices of wedding banquets in Singapore and consumers being willing to accept alternatives to a hotel wedding.
We believe Jumbo’s high degree of flexibility in menu customisation positions it as a more affordable alternative to hotels.

We paid a visit to Dianping.com, China’s most popular restaurant-review website, to get a feel on how Jumbo’s outlets have been performing. Jumbo’s outlets have been averaging close to perfect scores.

We keep our FY16-17 core net profit estimates constant given resilient sales in Singapore and China buoyed by strong visitor arrival numbers.
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 DCF-based target price of S$0.55.
We see further upside to our target price should the store count expansion schedule or per pax spending in China 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/ 2016-04-06

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.55 Same 0.55