Jumbo Group - DBS Research 2016-07-20: Delivering growth

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JUMBO GROUP LIMITED 42R.SI 

Jumbo Group - Delivering growth

• JV/franchise could take shape by FY17F.
• Factoring in a modest increase in JV income.
• Raise FY17-18F earnings by 6%.
• Maintain BUY with a higher S$0.72 TP.

Maintain BUY with a higher TP of S$0.72. 

• We raise our TP for Jumbo to S$0.72 to factor in marginal impact from JV/franchise arrangement regionally. 
• While our earnings have accounted for organic store expansion in Singapore and China, our previous numbers had not reflected impact from regional franchise arrangements. 
• We anticipate JV and franchise development to take shape and add to earnings marginally from FY17F in at least one or more targeted areas. We therefore raise our FY16-17F earnings by a modest +6%. 
• Our TP is hence nudged marginally higher to S$0.72 based on 23x FY17F PE. 
• We continue to like Jumbo Group (Jumbo) for its rapid growth in China, close to 30% ROE in FY16F, relatively higher margin than peers, cash generative business, and strong net cash balance.

Bottom-line growth focused, as opposed to chasing revenue growth. 

• We showcased Jumbo to our clients in Hong Kong on a non-deal roadshow (NDR) recently and appended more details and insights into the stock’s outlook and earnings traction. 
• Key areas of interest which were addressed centred on the IPO, partnership with Breadtalk in China, and growth and operations in China. In particular, there were concerns that some restaurant chains have over-expanded in China, only to scale down ultimately. 
• Management recognises this pitfall and is committed to running each and every restaurant in China profitably as opposed to rapidly increasing outlets.

Valuation:

• Pegged to peers’ average of 23x FY17F PE. Jumbo is trading at 20.1x FY17F PE, below peers’ 23x FY17F PE. 
• We peg our valuation of Jumbo at 23x FY17F PE, in line with the peers’ average to derive at our target price of S$0.72.

Key Risks to Our View:

• Apart from operational risks, we see failure to deliver growth in China as a key risk to our earnings growth projection. 
• We primarily view Singapore’s business as stable while the bulk of the growth is driven by the China business.

Alfie Yeo DBS Vickers | Andy Sim CFA DBS Vickers | http://www.dbsvickers.com/ 2016-07-20

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.72 Up 0.69