Jumbo Group - UOB Kay Hian 2016-08-16: 3QFY16 Results In Line But Valuations Stretched; Downgrade To HOLD

Jumbo Group (JUMBO SP) - UOB Kay Hian 2016-08-16: 3QFY16: Results In Line But Valuations Stretched; Downgrade To HOLD JUMBO GROUP LIMITED 42R.SI

Jumbo Group (JUMBO SP) - 3QFY16: Results In Line But Valuations Stretched; Downgrade To HOLD

  • Jumbo delivers once again in a challenging retail economic environment where brick and mortar players are facing significant operating cost pressure. 
  • China operations continued to show resilience in arguably one of the world’s most competitive F&B scenes. However, we find valuations stretched on the back of a 268% return since its Catalist debut in Nov 15. 
  • We raise our target price by 9% as we cut our risk-free rate assumption by 50bp. 
  • Downgrade to HOLD with a higher DCF-based target price of S$0.60. Entry price: S$0.54.



WHAT’S NEW


3QFY16 results in line with our expectation. 

  • Jumbo Group’s (Jumbo) 3QFY16 net profit rose 62.8% yoy due to contributions from two new Jumbo Seafood restaurants at Raffles City Shanghai and the Shanghai International Finance Centre as well as an increase in revenue from the group’s Singapore restaurants. 
  • 9MFY16 net profit came in at 70% of our full-year forecast.

Downgrade to HOLD as we find valuations stretched at this level. 

  • Our higher DCF-based target price of S$0.60 (terminal growth: 3%, cost of equity: 9.5%) implies 21x FY17F PE, which is a 50% premium to local and regional peers’.


STOCK IMPACT


Chinese outlets continued to perform. 

  • The Chinese outlets accounted for about 16% of total sales in 3QFY16 (3QFY15: 9%). Jumbo seafood outlets in Singapore saw a small uptick in average consumer spending in 3QFY16 while some non-seafood outlets faced stable to slowing sales. 
  • We keep our average spending per head constant at about S$60 for the Singapore seafood outlets and S$64 for China seafood outlets in FY16. 


STOCK IMPACT


Management plans to expand cautiously. 

  • We maintain our view that any new outlets this year will likely be non-seafood restaurants. Our forecasts have not incorporated any further opening of seafood restaurants in Singapore and China in FY16.

Lowering risk-free rate assumption. 

  • Post the Brexit referendum on 23 June, the 10- year SGS shed 29bp to 1.75% on 12 Aug, 125bp lower than our risk-free rate assumption of 3%. We lower our risk-free assumption by 50bp to 2.5% on expectations of a prolonged low interest rate environment amid increased global macro uncertainties.


EARNINGS REVISION/RISK

  • We keep our FY16-17 core net profit estimates unchanged.
  • Key risks include a sales slowdown in Jumbo’s China outlets.

VALUATION/RECOMMENDATION

  • Downgrade to HOLD with a higher-DCF based target price of S$0.60 (previously S$0.55). 
  • Nevertheless, we continue to view Jumbo as a strong cash-generative consumer play with defensive characteristics. 
  • Our target price implies 21x FY17F PE, which is a 51% premium to local and regional peers’. This is justifiable given: 
    1. Jumbo’s stable cost structure, 
    2. strong brand equity, 
    3. successful China expansion thus far, and 
    4. superior ROE to peers’. 
  • Entry price is S$0.54.


SHARE PRICE CATALYST

  • Higher-than-anticipated store count openings.




Nicholas Leow UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-08-16
UOB Kay Hian SGX Stock Analyst Report HOLD Downgrade BUY 0.60 Up 0.550


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