Jumbo Group (JUMBO SP) - UOB Kay Hian 2017-03-28: Expands Into Beijing

JUMBO GROUP LIMITED 42R.SI

Jumbo Group (JUMBO SP) - Expands Into Beijing

Jumbo announced a JV to open the first Jumbo seafood restaurant in Beijing following the announcement of the group’s franchise agreement in Vietnam. This is Jumbo’s second foray into overseas franchising after its first venture in Indonesia failed to find traction.
If Jumbo can find the right partners this time round, this could be start of group becoming a truly regional brand.

Maintain HOLD but with a slightly higher DCF-based target price of S$0.67. Suggested entry price: S$0.61.

Jumbo Group (Jumbo) has entered into a JV with Beijing Hualian Departmental Store (BHDS) to open the first Jumbo Seafood restaurant in Beijing, China. Jumbo will hold a 51% stake in the joint venture while Beijing Hualian Group will hold the remaining 49%.
The new restaurant will open by 3Q17 and will cost Jumbo an initial Rmb5.1m. BHDS is part of the Beijing Hualian Group which is a leading retailer in China operating supermarkets and departmental stores. Our forecasted per pax spending for the Beijing outlet is similar to our per pax spending in Shanghai at S$64.

Vietnam is Jumbo’s second foray into the franchising business after its failure in Indonesia in 1995. We believe the failure in Indonesia came down to Jumbo choosing the wrong partner.
Management has indicated that on top of an upstanding management team, ideal franchisees would include companies that are engaged in property development which would help secure retail space at favourable rents, or large local F&B players which understand the local F&B scene well. This would allow Jumbo to leverage on the strengths of the franchisee to roll out new outlets at a sustainable pace. Jumbo will assist in the training, hiring and designing of menus for potential franchisees.
Our channel checks indicate that the Vietnam franchisee (Nova Bac Nam 79 Joint Stock Company) has a strong background in real estate and property development in Ho Chi Minh City and Danang, which would make it a strong partner for Jumbo to penetrate the Vietnam market.

Jumbo operates its own e-commerce website - Jumbo eShop - where customers can buy sauces and Jumbo restaurant vouchers. Management intends to expand product offerings by introducing more sauces before they actively engage in more aggressive customer acquisition.
Jumbo also has a presence on Food Panda and Deliveroo where customers can even order Jumbo’s award-winning chilli-crab. Even though on-line sales currently make up a very small portion of total sales, should e-commerce take off in Singapore, we could see this segment contributing substantially more.

Management is still committed to expanding its store count in Singapore but at a selective pace. We expect any new outlets to be in the central business district (CBD), given Jumbo’s lack of presence in Singapore’s Core Central Region, the success of Riverside Point and the IFC Shanghai outlet.
We are forecasting one additional outlet in Singapore in FY17.

We raise our FY18-19 core net profit estimates by 2.0% and 2.4% to account for the new joint venture in Beijing which we expect to start contributing to the group in FY18. Our forecasts have not incorporated any earnings potential from franchising agreements as we await more clarity on the structure of the deal.
Key risks include a slowdown in sales in China and any pandemic that could impact tourist arrivals. [this sounds as if disease outbreak is common in Singapore]

Maintain HOLD but with a slightly higher DCF-based target price of S$0.67.
Suggested entry price is S$0.61. However, the franchise agreements have the potential to surprise on the upside while an accelerated roll-out of new store openings from franchisees could lift our target price.

Nicholas Leow UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-03-28

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