Jumbo Group (JUMBO SP) - UOB Kay Hian 2017-02-15: 1QFY17 Seasonally Weak Results; Expect Pick-up In 2QFY17

JUMBO GROUP LIMITED 42R.SI

Jumbo Group (JUMBO SP) - 1QFY17 Seasonally Weak Results; Expect Pick-up In 2QFY17

1QFY17 results are in line with our estimate as 1Q and 3Q are historically weak quarters for Jumbo. Demand in Singapore was affected by lower tourist arrivals and the impact of the Zika virus.
Operating costs have risen slightly on the back of its move to new corporate offices in Singapore and Shanghai.

Expect more franchising agreements this year as Jumbo is in discussions with partners across the Asia Pacific.
Maintain HOLD and DCF-based target price of S$0.65. Entry price: S$0.59.

For 1QFY17, Jumbo recorded a net profit of S$2.6m (+26.1% qoq), in line with our expectation. 1QFY16 was a low base due to IPO expenses (S$0.7m) and pre-operating expenses for the third Jumbo Seafood outlet at IFC Shanghai. Excluding IPO expenses, 1QFY16 net profit would have been S$2.7m.
Historically, 1Q and 3Q (of its financial year) are seasonally weak quarters due to the school holidays. Using FY16 as a guide, 2QFY16 net profit accounted for over 38% of full-year’s profit while 1QFY16 accounted for 13% of net profit for the year.

Operating lease expense rose 10.2% yoy from S$3.0m in 1QFY16 to S$3.3m in 1QFY17. This was attributable to the leases for the group’s new outlets and new corporate offices in Singapore and Shanghai.
Employee benefit expense rose 9.5% yoy from S$9.2m in 1QFY16 to S$10.1m due to the increase in headcount for the group’s outlets. There was also an overall increase in staff remuneration.

We estimate Singapore sales were flat with China accounting for the yoy growth in sales. This was likely due to the impact from the Zika virus as customers were more cautious and avoided outdoor dining. Singapore tourism numbers were also slower in Oct 16.

Jumbo is exploring franchising opportunities to diversify and grow. The group has secured a franchise agreement with a Vietnamese firm called Nova Bac Nam 79 Joint Stock Company for the right to operate Jumbo Seafood restaurants in Ho Chi Minh City and Danang.
Jumbo is exploring franchising opportunities in Thailand, Indonesia, Hong Kong and Macau. We expect more partnerships to be rolled out in the near future.
Our forecasts have not incorporated any earnings potential from franchising agreements as we await more clarity on the structure of the deals.

We keep our FY17-19 core net profit estimates unchanged.
Key risks include a slowdown in sales in China outlets and pandemics in Singapore and Shanghai.

Maintain HOLD and DCF-based target price of S$0.65. Our target price implies a 42% premium to Hong Kong- and Singapore-listed peers’ average FY18 PE of 14.6x.
We find the premium justifiable, given Jumbo’s superior ROE, stronger brand equity and successful execution in China. Suggested entry price is S$0.59. Note the franchise agreements could surprise on the upside and an accelerated roll-out of new store openings from franchisees would lift our target price.

Nicholas Leow UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-02-15

UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 0.650 Same 0.650