Jumbo Group - DBS Research 2016-08-15: Margin outperforms

JUMBO GROUP LIMITED 42R.SI

Jumbo Group - Margin outperforms

We raise our TP for Jumbo Group (Jumbo) to S$0.77 to factor in higher margins and earnings for FY17-18F.
The results in 3Q16 made us realise that we were conservative in our margin estimates, and hence we have raised our margin assumptions. Accordingly, we raised our TP by 7% to S$0.77.
We continue to like 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.

Net profit doubled to US$3.4m as revenue rose by 14% y-o-y to S$32.7m, driven by two new outlets in Shanghai and overall improvement in existing outlets.
Revenue was slightly lower than our expectations but this was made up for by better than expected gross margins of 62.9% and EBIT margins of 11.9%.

We raise our FY17-18F gross margin assumption to 61.4% to 62% respectively, and tweak our opex to reflect higher EBIT margins of 14.2% from 13.2%.
Taking these into account, we raise FY17-18F earnings by 4- 6%. There are no signs of margin pressure in 4Q16 as crab costs vs revenue per head remains consistent. Earnings will also benefit as Jumbo has started operating the extension at its Riverside outlet. We had already factored in modest JV and franchise contribution from FY17F.

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$0.77.

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/ 2016-08-15

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.77 Up 0.720