Jumbo Group Limited - CGS-CIMB Research 2018-06-22: Seafood Treasure In Asia

SGinvestors.io

JUMBO GROUP LIMITED SGX: 42R

Jumbo Group Limited - Seafood Treasure In Asia

• Established F&B group with highly profitable Jumbo Seafood outlets selling iconic chilli crabs in Singapore, China, Vietnam and Taiwan. 
• Targeting to open its sixth Singapore Jumbo Seafood outlet in the near term –we think the outlet may be located in Jewel Changi Airport that is due to open in 2019F. 
• China remains a key growth market, with operating presence in three cities; we expect Jumbo to increase its pace of new outlet openings going forward. 
• It plans to bring Hong Kong’s famous Tsui Wah eatery to Singapore, which we believe would add an additional income stream to the group from FY9/19F onwards. 
• Initiate with ADD and a target price of S$0.62, based on 23x CY19F P/E, below its regional peer average (excluding Singapore) of 24.7x.   

Serving Delicious Chilli Crabs Since 1987

Leading seafood restaurant operator in Singapore

• Jumbo (珍宝), whose Chinese name means “treasure”, operates a total of 13 food and beverage (F&B) outlets in Singapore under five restaurant brands – Jumbo Seafood (珍宝海鲜), JPOT(珍宝火锅), Ng Ah Sio Bak Kut Teh (黄亚细肉骨茶), Chui Huay Lim Teochew Cuisine (醉花林品潮轩) and J Café, and five Jumbo Seafood outlets in China.
• Jumbo has also franchised two outlets under the Jumbo Seafood brands – one in Vietnam and another in Taiwan. In addition, the group manages one Singapore Seafood Republic outlet located in Resorts World Sentosa.
• Its major controlling shareholder is Mr Ang Hon Nam, who founded the seafood restaurant business and owns 57.9% of the group currently. The business is now managed by Mr Ang Hon Nam’s son, Mr Ang Kiam Meng, who is the Group CEO.
• The first Jumbo Seafood outlet opened at East Coast Seafood Centre, Singapore in 1987 and this is still the flagship outlet that is in operation today. The full-service restaurant and other Jumbo outlets continue to receive positive reviews on various restaurant review websites such as TripAdvisor, HungryGoWhere and Yelp – a testament, in our view, that its food offerings are not just a fad but exhibit consistent quality and appeal, which continues to attract diners.

Profitable domestic F&B business

• Its local F&B business has continued to be profitable, despite muted growth in the number of Singapore outlets in recent years. Jumbo Seafood outlets are the group’s top revenue contributors, generating c.S$87m or about 73% of FY17 Singapore F&B revenue, according to management. This translates to S$16m- 17m of sales generated per Jumbo Seafood outlet.
• The outlets are patronised by both locals and tourists – mostly from China – and the convenient cashless options offered, such as Alipay and WeChat Pay, have boosted sales from tourists.

Potential sixth Jumbo Seafood outlet in Singapore after 10-years hiatus?

• The last Jumbo Seafood outlet in Singapore was opened at Dempsey Hill in Feb 2008.
• Looking ahead, the group plans to open two new F&B outlets (Jumbo Seafood and CHL Teochew Cuisine) in Singapore over the next few years, which would break the 10-year hiatus in opening of new Jumbo outlets in the country.
• With the upcoming 2019F launch of Jewel Changi Airport (a 10-storey mixed-use complex that will house 300 shops and F&B outlets within Changi Airport), we think this is a potential location for the sixth Jumbo Seafood outlet in Singapore, given the superb location that could capture tourists familiar with the Jumbo Seafood brand. Jewel Changi is due to open in 2019F.
• We believe the potential new Jumbo Seafood outlet in Jewel Changi could easily achieve S$12m annual sales by FY20F, driven by a high tourist traffic flow and “novelty effect” that will attract throngs of shoppers and diners to the new mall in Changi Airport. Our projection is based on a presumed seating capacity of 150 and daily sales of c.S$34,000 generated by the outlet, assuming average spend of S$65 per diner.

Extending footprint beyond Singapore…

Pace of new restaurant openings in China could pick up

• Jumbo first forayed into China in Nov 2013 with the launch of its Jumbo Seafood Restaurant in Xuhui District, Shanghai, through a 70:30 JV with Together Inc Pte Ltd, a subsidiary of BreadTalk (SGX:CTN). The full-service restaurant is able to accommodate more than 250 diners and has delivered positive net profit since FY13F. Jumbo has since added one new restaurant in Shanghai p.a. in FY14-17, bringing its current network of restaurants in Shanghai to four.
• In Jul 2017, Jumbo opened its first restaurant (6,500 sq ft) in Beijing via a 51:49 JV with Beijing Hualian (SKP) Departmental Store (Unlisted, not to be confused with the listed Beijing Hualian Department Store Co Ltd). The restaurant can accommodate more than 150 diners and is located within Beijing SKP, a popular high-end luxury and fashion shopping mall that has attracted designer brands such as Louis Vuitton. 
• Jumbo recently launched its first outlet in the city of Xi’an, as announced on 28 May 2018. The 1,300 sq m (c.14,000 sq ft) outlet has a seating capacity of 280 and is located in another mall under the SKP brand.
• With an operating presence in three cities in China now, we think Jumbo’s pace of new restaurant openings could pick up from now on. The group plans to add 3-4 new outlets in Shanghai, Beijing and Shenzhen over the next five years, based on its guidance. The group is also looking at potential expansion via franchise business model into other overseas markets, including Hong Kong, Macau, Indonesia and Thailand.

Jumbo Seafood’s foray into Taiwan

• Jumbo entered into a 49:51 JV with Baipin Co (Unlisted) in Nov 2017 to introduce its Jumbo Seafood brand to Taiwan. According to management, Baipin is linked to Mr Henry Tseng, who was responsible for bringing several Michelin-starred restaurants including Tim Ho Wan and Tsuta to Taiwan. 
• The first Jumbo Seafood outlet in Taiwan was opened in Shin Kong Mitsukoshi mall in Taipei’s Xin Yi district in Dec 2017, under a franchise agreement between the JV and Ho Sing Food Co Ltd (Unlisted). Jumbo will earn a one-off franchise fee and monthly royalty fee income under the franchise agreement.
• Based on the positive reviews on Jumbo Seafood gathered from local food blogs, we expect the restaurant to do well and expect it to start contributing positively to group net profit in 2HFY18F, after taking into account the initial start-up and marketing expenses.
• Jumbo plans to open 6-8 Jumbo Seafood outlets in Taiwan but has not committed to any timeline to achieve this target. Based on company statements and the pace of new branch openings by other popular restaurant chains such as Tim Ho Wan and Putien in Taiwan, we conservatively estimate that Jumbo would open one new Jumbo Seafood outlet every year. This would contribute S$0.5m-S$0.9m (excluding franchise and royalty income) to group net profit in FY19-20F, based on our estimates.

Potential for further expansion in Taiwan with Ng Ah Sio Bak Kut Teh

• Apart from the Jumbo Seafood restaurant brand, the group’s Ng Ah Sio Bak Kut Teh brand has potential for expansion to Taiwan, in our view.
• Ng Ah Sio Bak Kut Teh is known among Taiwanese food blogs as one of the three most popular brands in Singapore, the other two being Song Fa and Founder Bak Kut Teh. Ng Ah Sio Bak Kut Teh serves peppery pork rib soup that appeals to both locals and Southeast Asian tourists. We have not factored the potential expansion of Ng Ah Sio Bak Kut Teh in Taiwan into our earnings forecasts.

Bringing Hong Kong’s famous Tsui Wah to Singapore

• Jumbo also entered into a JV with HK-listed Tsui Wah Holdings (1314 HK) in Mar 2018 to bring Hong Kong’s famous Tsui Wah eatery to Singapore.
• Known for its ‘Crispy Bun Served with Sweet Condensed Milk’, the first Tsui Wah eatery outlet in Singapore opened its doors in Clarke Quay in Jun 2018. We believe the outlet will do very well in Singapore, like it has in Hong Kong, Macau and China. Further expansion in the country will present an additional income stream for the group in FY19F onwards.

Financial Forecasts & Assumptions

Singapore accounted for 82% of FY17 revenue

• Jumbo’s Singapore F&B outlets accounted for the bulk of the group’s FY17 revenue (82%), although this figure has trended down from 100% in FY13 as Jumbo continued to expand its PRC business. 
• Management has guided that c.60% of its FY17 revenue came from Singapore Jumbo Seafood outlets and c.18% from PRC Jumbo outlets. 
• We project a 9.3% CAGR in revenue over FY17-20F.

Labour and rental make up the bulk of operating costs

• In FY17, the cost of goods sold (raw materials) accounted for the biggest chunk of Jumbo’s operating costs (c.41%), followed by labour costs (c.32%) and operating lease (rental) expenses (c.11%). The group has kept rental costs subdued, in our view, by avoiding shopping mall locations for many of its F&B outlets in Singapore.

Look past FY18F for earnings growth from new outlet expansion

• We project an initial dip in gross margin in FY18F due to the spike in seafood costs, as reflected in Jumbo’s 1HFY18 results. Thereafter, we expect a gradual recovery in gross margins from FY19F onwards as we believe Jumbo would be able to pass on the higher seafood costs and benefit from bulk discounts on larger purchases of raw materials and economies of scale.
• We project operating expenses (including cost of sales) per outlet (taken on a year-end basis) of around S$7.2m, factoring in higher staff costs amid tight labour conditions in the F&B market. We expect EBITDA to return to its growth track in FY19-20F, once the group recognises full-year earnings contribution from its two newest PRC outlets (fourth Shanghai outlet and first outlet in Xi’an). 
• Our EBITDA forecasts take into account franchise fee income from franchise Jumbo Seafood outlets in Vietnam and Taiwan.

Jumbo to register 9.9% EPS CAGR over FY17-20F

• We forecast net profit of S$17m in FY19F and S$19m in FY20F, representing 9.9% CAGR in EPS over FY17-20F (c.13.9% over CY17-20F).
• Jumbo does not have a formal dividend policy but has paid out dividends above 70% of its net profit on a semi-annual basis in FY16-17. We assume the group will keep its dividend payout ratio in the 70-75% range.

Anticipate return to positive net profit growth in 1HFY19F

• Historically, Jumbo’s second quarter is seasonally stronger than the other three quarters in the fiscal year as it coincides with the Chinese New Year festivities. While 2QFY18 revenue came in 6% higher y-o-y, higher operating costs (mostly employee benefit expenses arising from new PRC outlets openings in 1HFY18) led to a 27% y-o-y decline in 2QFY18 net profit. 
• Given that we expect 2HFY18F net profit to be lower y-o-y (partly due to the initial start-up costs incurred for two new PRC outlets established this year), we expect the group to only return to positive net profit growth in 1HFY19F onwards.

Attractive cash-generative business

• Similar to other successful F&B businesses, Jumbo generates positive operating cash flow due to the high cash conversion cycle. The decline in operating cash flow from S$20m in FY16 to S$12m in FY17 was attributable to a sharp fall in payables relating to accrued employee benefit expenses. We expect operating cash flow to increase over FY18-20F as Jumbo steadily expands its number of F&B outlets.
• Looking ahead, management expects capex to be more concentrated in the establishment of new outlets and outlet expansion, although we think the company would budget for expenditure relating to the acquisition of new equipment for its central kitchen and corporate offices.

Valuation & Recommendation

Initiate with an ADD rating and target price of S$0.62

• We like Jumbo for its portfolio of strong F&B brands and well-executed overseas growth strategy for its Jumbo Seafood brand. 
• Jumbo is currently trading at CY19F P/E of 19.2x (against a 3-year EPS CAGR of 13.9% over CY17-20F), below its historical mean of 26.1x since its listing in Nov 2015. Our target price of S$0.62 is based on a CY19F P/E of 23x, below its regional peer average (ex- Singapore) of 24.7x. 
• We note that Jumbo has a higher 3-year EPS CAGR than many of its Singapore-listed peers (average: 1.9%) over CY17-20F.
• We initiate coverage on Jumbo with an ADD rating in anticipation of strong earnings growth in FY19F. 
• Potential re-rating catalysts are stronger-than-expected earnings and a significant uplift in gross margins.

Risks

Sharp escalation in seafood cost and supply shortage.

• Jumbo purchases key ingredients such as seafood on a daily basis from its suppliers to ensure freshness of these ingredients. A sharp increase in the prices of mud crabs, the supply of which is subject to seasonal patterns and climate conditions, could adversely affect profits generated by the Jumbo Seafood outlets. 
• On a positive note, Jumbo is able to minimise the risk of shortage of supplies as it is able to tap on a high number of crab suppliers (about 20) and imports crabs from about five countries, including Sri Lanka.

Slowdown in store sales.

• Apart from sluggish economic conditions that could negatively affect consumer spending in Jumbo’s F&B outlets, new F&B entrants that have established outlets in close proximity to the group’s outlets could also take some of its business away. However, we think Jumbo would be able to rely on its strong branding to attract both new and returning patrons, including tourists, to its outlets.

Colin TAN CGS-CIMB Research | Cezzane SEE CGS-CIMB Research | https://research.itradecimb.com/ 2018-06-22

SGX Stock Analyst Report ADD Initiate ADD 0.62 Same 0.62