Jumbo Group - DBS Research 2017-02-14: Growth prospects priced in for now

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JUMBO GROUP LIMITED 42R.SI

Jumbo Group - Growth prospects priced in for now

• 1Q17 earnings slightly below; demand affected by lower tourist arrivals to Singapore in October.
• Margins below expectations on higher operating expenses.
• Trimmed FY17-18F earnings by 6-7%.
• Downgrade to HOLD, TP lowered to S$0.72.

Downgrade to HOLD with lower TP of S$0.72. 

• We downgrade Jumbo from BUY to HOLD with lower TP of S$0.72. 
• Since our initiation on 1 June 2016, Jumbo’s share price has gained 36% from S$0.535 to S$0.73 currently, with valuations re-rating from 18x forward PE at 0.9x PEG to 23x FY17F PE at 1.9x PEG.

Share price now trades in line with regional peers’ average of 23x. 

• As such, we believe Jumbo’s share price at the current level has priced in its earnings prospects. 
• Growth will nonetheless be driven by 
  1. store expansion and growth in China; 
  2. greater regional franchise and JV cooperation; 
  3. outlet expansion in Singapore. 
• Jumbo’s fundamentals still remain strong with its cash generative business model, net cash on its balance sheet, strong ROE, rapid growth in China and ongoing franchise and JV negotiations to grow the brand. 
• Downgrade to HOLD for now until valuations become more palatable.

1Q17 (FYE Sep) net profit below. 

• Headline net profit of S$2.6m (-44% y-o-y) was slightly below expectations on the back of lower than expected revenue of S$32.7m (+5.8%). We believe the disappointment was due largely to lower sales arising from the Zika virus situation in October. Tourist arrivals to Singapore also shrank by 0.9% y-o-y in October. 
• While gross margins improved on China’s performance, both operating lease expenses and staff costs were a tad higher led by an increase in headcount and increased floor area for more stores. Operating margins were hence narrower.

Valuation

• Pegged to peers’ average of 23x FY17F PE. Jumbo is trading in line with peers at 23x FY17F PE. 
• We derive our valuation of Jumbo based on 23x FY17F PE at a target price of S$0.72, pegged to regional peers’ average.

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. Singapore’s business is stable while the bulk of the growth is driven by China.

Alfie YEO DBS Vickers | Andy SIM CFA DBS Vickers | http://www.dbsvickers.com/ 2017-02-14

DBS Vickers SGX Stock Analyst Report HOLD Downgrade BUY 0.72 Down 0.770