Jumbo Group Ltd - Maybank Kim Eng 2016-08-14: China still the star act

JUMBO GROUP LIMITED 42R.SI

Jumbo Group Ltd (JUMBO SP) - China still the star act

Jumbo’s 3Q/9M 2016 results were in line. It did extremely well and there were no surprises. China, not surprisingly, was the star in 3Q16 again.
However, as valuations have caught up and with no reason to raise forecasts, we downgrade the stock to HOLD until its franchising strategy can see more concrete developments.
Blended PE/DCF TP is raised slightly to SGD0.69 (from SGD0.65) as we roll forward to 20x FY17E.

3Q16 revenue/NP +14%/+70% YoY. 9M16 revenue/NP +14%/+37% YoY, or 72% of our full-year forecast respectively. China again received the star attribution for the sterling growth, on the back of its two new Jumbo Seafood restaurants in Shanghai, which opened in Aug 2015 and Jan 2016 respectively. The rest of Jumbo’s restaurants also saw better revenue.
GP margin rose slightly despite higher crab cost. Other operating expenses (eg utilities, rentals and wages) also remained well-controlled.

The stock has done well following our initiation and reached our TP of SGD0.65, which is based on a blend of 20x FY16E EPS and two-stage DCF value of SGD0.77. Management has mentioned they are planning to franchise, but we think a more appropriate window to see steps in this direction is early 2017.
For now, we see no reason to raise forecasts. TP is raised slightly to SGD0.69 as we roll forward to 20x FY17E, but we cut to HOLD as valuations are no longer conducive at 26x/22x FY16/17E.

Jumbo’s next step is to implement a franchise strategy to speed up its expansion momentum. By itself, it can probably add only two outlets a year due to internal manpower constraints and as it would be a first-time franchisor. With a good partner, it could potentially do more. We understand that management is currently talking to interested partners.
But as Jumbo is a first-time franchisor, we think it is still early in the process as the preparation is likely to be lengthy.

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.

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/ 2016-08-14

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 0.690 Same 0.650