Jumbo Group - UOB Kay Hian 2016-05-17: 2QFY16 Expanding Cautiously; No Surprises As China Continues To Perform

JUMBO GROUP LIMITED 42R.SI

Jumbo Group - 2QFY16: Expanding Cautiously; No Surprises As China Continues To Perform

Jumbo's 2QFY16 results were in line with our expectations.
Strong Chinese New Year sales in Singapore and China contributed to an 18.5% yoy increase in revenue.
The group has been expanding very selectively in Singapore on the back of weak consumer sentiment and a mixed macro outlook.
Maintain BUY and DCF-based target price of S$0.55.

Jumbo Group’s (Jumbo) net profit increased to S$5.8m in 2QFY16, up 49.4% yoy (2QFY15: S$3.9m), driven by contributions from the two new Jumbo Seafood restaurants at Raffles City Shanghai (opened in Aug 15) and the Shanghai International Finance Centre (opened in Jan 16) as well as a slight uptick in revenue from the rest of the group’s restaurants.
Jumbo's revenue increased to S$39.6m in 2QFY16 (+18.5% yoy) vs S$33.4m in 2QFY15.

Cost of sales grew 30.0% to S$15.7m (2QFY15: S$12.1m), mainly due to higher food costs in Shanghai.
We attribute the higher raw material and consumables costs to the lack of economies of scale for the Shanghai operations.
Jumbo has three outlets in China with a total seating capacity of 600. If Jumbo could open another two outlets in China to bring total seating capacity to 1,000, we estimate the company would begin to enjoy optimal cost savings through economies of scale.

We visited Dianping.com, China’s most popular restaurant-review website, to get an indication of the average spending per pax. Based on the website so far, spending per pax has exceeded our expectations at all three outlets. However, we believe this is due to the exceptionally strong Chinese New Year sales which have resulted in a skewed per pax spending reported on Dianping.com, especially for IFC Mall which opened in Jan 16. We have elected to revise per pax spending estimates at iAPM up by 10% to Rmb275.
For Raffles City Shanghai outlet, we adjusted our per pax spending down by 10% to account for the younger crowd with lower spending power.

Jumbo is expanding its Riverside Walk outlet by 50%. Given the 3-4 months needed to open and renovate a new outlet, Riverside Walk should be operating at full capacity by 4QFY16.
The group has been very selective in looking for expansion opportunities locally due to the mixed macro outlook and weak consumer sentiment in Singapore which could cause a slowdown in per pax spending.

We believe there is a good chance that any additional outlets opened this year in Singapore could include non-seafood restaurants which have lower per pax spending and are less sensitive to an economic slowdown.

Fine-tune 2017-18 profit estimates by 0.5% on the back of adjusted per pax spending in China and contribution from the expanded Riverside Walk outlet. On our latest estimates, Jumbo is projected to deliver a 3-year EPS CAGR of 13.4% for 2015-18.
Key risks include:
1. poor performance at China outlets,
2. higher-than-expected rainfall to affect patronage, and
3. economic slowdown in Singapore or China impacting consumer spending.

Maintain BUY and DCF-based target price of S$0.55.
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/ 2016-05-17

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