Jumbo Group - RHB Invest 2019-06-21: The Hottest Chilli Crab In Town; Initiate BUY

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JUMBO GROUP LIMITED (SGX:42R)

Jumbo Group - The Hottest Chilli Crab In Town; Initiate BUY

• Initiate coverage on Jumbo with BUY and SGD0.47 Target Price, 24% upside plus 4% yield.
• JUMBO GROUP (SGX:42R) is one of the leading consumer foodservice retailers in Singapore. Today, the group has five brands across 32 F&B outlets in Asia.
• With new store openings and expansion of its franchisee network, we project earnings to grow at 15% CAGR over FY18-21F. We expect Jumbo Group's share price to rerate upwards as it continues to deliver earnings.

Company Profile

No.1 seafood restaurant in Singapore.

• Established in 1987 as a single outlet in the East Coast, today, JUMBO GROUP (SGX:42R) is the leading seafood chain in Singapore with six outlets in the lion city. It was awarded Best Seafood Platinum Winner in 2018 by Diners’ Choice and One Diamond Restaurant by Meituan-Dianping’s 2018 Black Pearl Restaurant Guide. The group has since ventured into new markets with six Jumbo Seafood outlets in China and five franchisee-operated stores across China, Taiwan, Vietnam and Thailand. It sells more than 1.8 tonnes of crabs per day.
• Jumbo Group also has other brands including Ng Ah Sio Bak Kut Teh, Chui Huay Lim, Zui Yu Xuan and Chao Ting and manages two JV brands - Singapore Seafood Republic and Tsui Wah. Including franchisees, the group has 32 F&B outlets in Asia.

Geographical breakdown.

• 80% of Jumbo Group’s revenue is derived from Singapore, and 20% from China. Jumbo China operations have two minority partners. BreadTalk owns 30% of Jumbo Seafood operations in Shanghai (four outlets), and SKP owns 49% of Jumbo Seafood operations in Beijing and Xi’an (one outlet each).
• In the Singapore market, Jumbo Seafood is driving the bulk of the revenue. However, chilli crab is not a staple food to eaten frequently. We expect the Jumbo Group to diversify its brand portfolio and focus on growing other brands including its Ng Ah Sio Bak Kut Teh, Teochew Cuisine brands as well as its JV, Tsui Wah. We believe the group might also bring other new brands into Singapore through JV or franchise rights.

Key Management

Mr Ang Kiam Meng, group CEO and executive director.

• Jumbo Group is considered Mr Ang’s family business. It is 45.5% owned by JBO Holdings, which is controlled by Mr Ang’s family.
• Mr Ang has been working with the group for over 25 years, and is a hands-on leader. In 2017, he relinquished his role as chairman of the Board to focus on Jumbo’s business strategies and development. He is also responsible for Jumbo Group’s overall management and operations.

Mr Tay Peng Huat, chief financial officer.

• Mr Tay was appointed CFO for the group in Dec 2014. He is responsible for Jumbo Group’s overall finance functions and accounting matters.
• Mr Tay has over 30 years of experience in finance and accounting, and graduated with a Bachelor of Accountancy from the National University of Singapore in 1988. He is a Fellow Chartered Accountant of Singapore with the Institute of Singapore Chartered Accountants.

Investment Merits

Strong brand equity of Jumbo Seafood

• Jumbo Seafood is Jumbo Group’s flagship brand, contributing c.80% (Singapore and China) to the group’s total revenue. Well-known for its signature chilli crab, Jumbo Seafood is a household name in Singapore’s food and beverage (F&B) scene. Amongst the locals, it is a common dining choice for festivities, family gatherings and special occasions such as Mother’s Day and Father’s Day. For tourists, Jumbo Seafood is a reputable and reliable brand to go to for the highly recommended local delicacy, chilli crab.
• As a result of its solid brand name, Jumbo Seafood is one of the few listed-restaurant brands in Singapore that could consistently generate positive same-store sales growth (SSSG) despite the challenging operating environment.

Growing through store expansions and strategic business alliances; 7 brands across 11 cities and 31 outlets.

• Today, Jumbo Group operates 19 F&B outlets under its five brands – Jumbo Seafood, Ng Ah Sio Bak Kut Teh, Chui Huay Lim, Zui Yu Xuan and Chao Ting. It also operates Tsui Wah as a JV partner and franchisee in Singapore and franchised out its Jumbo Seafood and Ng Ah Sio Bak Kut Teh brand to the overseas market.

Expansion through new store openings under Jumbo and subsidiaries.

• This year, Jumbo Group opened two Jumbo Seafood restaurants in Singapore at Ion Orchard and Changi Airport Jewel. We note that Singapore’s Jumbo Seafood outlets typically break even in less than six months, and have a payback period of less than two years; we expect these two restaurants should contribute positively to earnings growth in FY19F- 20F.
• Jumbo Group also launched two new Teochew cuisine brands in April this year, namely Zui Yu Xuan and Chao Ting, located at Far East Square in Singapore. The former is a higher-end Chinese restaurant, we expect it to target business dining or family occasions; while the latter is a more mass-market brand to target the office lunch crowd. We are positive on the expansion of Jumbo’s brand portfolio, as it helps to diversify its customer base. Our recent channel checks also suggest that Chao Ting has seen great traction during weekday lunch time, while Zui Yu Xuan was seen featured by food bloggers in early June.
• Looking ahead, Jumbo Group will continue to expand its store count to drive earnings growth. Management intends to potentially expand its Ng Ah Sio Bak Kut Teh brand to Shanghai or Beijing.

Aside from own-store openings, management aims to expand its footprint through franchises and/or JVs.

• Over the last 12 months, 3 franchised Jumbo Seafood restaurants and two franchised Ng Ah Sio Bak Kut Teh outlets were opened. While we estimate franchisee income constitutes only 1-2% of Jumbo Group’s revenue, we note that this additional income would flow directly to its bottomline, and certainly help to raise the group’s overall margins.
• Jumbo Group also brought Tsui Wah into the Singapore restaurant scene as a JV partner cum franchisee last year. We note that Tsui Wah is currently loss-making, but EBITDA positive. Jumbo Group has plans to open another two Tsui Wah outlets in Singapore. We expect at least one outlet to open by the end of this year, which should help to improve economies of scale and share the overhead costs.

Free cash flow generative company; Dividend yield of 4%.

• As with most retail business, Jumbo Group has a cash flow generative business model and a negative cash conversion cycle. Over the last five years, the group generated c.SGD15m worth of operating cash flow pa, and spent c.SGD6m for capex each year. This would leave free cash flow of approximately SGD10m per year.
• While there is no fixed dividend policy in place, Jumbo Group strives to pay 70-75% of the group’s PATMI to shareholders as dividends. We estimate this to translate to 3.7% dividend yield for FY19F.
• See Jumbo Group's dividend history.

Valuation

• We derive our Target Price of SGD0.47 based on DCF valuation.
• Our DCF assumes 8.2% cost of equity and 2% terminal growth. We believe this is justified given Jumbo Group’s strong brand names in Singapore and its ability to generate consistent positive SSSG of c.3-5% even when F&B revenue in Singapore was stagnant.
• Our Target Price also implies a forward P/E of 23x, in line with peer average.

Undervalued stock.

• The stock is trading at 19x FY19F P/E and 10x FY19F EV/EBITDA – well below its peer average of 23x FY19F P/E and 13x FY19F EV/EBITDA. This is in spite of its superior growth outlook of 15% earnings CAGR over FY18-21F, better ROE and dividend yield. See Jumbo Group's share price history.

Financial Discussion

Earnings growth driven by new store openings and SSSG in Singapore; We forecast revenue to grow 10% CAGR over FY18-21F.

• 80% of Jumbo Group’s revenue is derived from Singapore while 20% is derived from China. In 1H19, Jumbo Group recorded slight y-o-y decline in revenue by 1.4%. This was largely attributed to slow sales in China and the closure of two Ng Ah Sio Bak Kut Teh outlets (located at Ngee Ann City and Tanjong Katong) and one Jumbo Seafood restaurant (National Service Resort & Country Club) in Singapore.
• Moving ahead, we expect stronger revenue to come from new store openings and SSSG from its Singapore operations. We forecast revenue to grow at a 10% CAGR over FY18- 21F, led by the net addition of three stores pa. In the near term, contribution from Singapore would increase at a faster pace, led by the newly-opened Jumbo Seafood restaurants and Teochew cuisine restaurants, while contributions from China may moderate on the back of weaker consumer confidence.

Bringing Ng Ah Sio Bak Kut Teh to China.

• Jumbo Group sees potential to bring its Ng Ah Sio Bak Kut Teh brand to China. We project 2-3 Ng Ah Sio Bak Kut Teh outlets to materialise in China by FY20F.
• We are generally positive on this development as we think Ng Ah Sio Bak Kut Teh’s smaller ticket size would allow it to target the mass market in China and bring more recurring patrons and sales. Using its peer, BREADTALK GROUP LIMITED (SGX:CTN)’s Song Fa franchise in China as a benchmark, the Ng Ah Sio Bak Kut Teh store should be able to achieve breakeven in two months, with an estimated payback period of one year.

SSSG of Jumbo Seafood Singapore to maintain.

• We forecast SSSG of Jumbo Seafood Singapore to stay at c.3%. We think this is achievable despite the tough F&B operating environment, given that revenue from this segment has grown at 4% CAGR over the last four years since IPO. The lowest pa growth was recorded in 2017, when the National Parks Board (NParks) restricted the outdoor seating space of its flagship store in East Coast Park, and construction near the National Service Resort & Country Club outlet affected footfall.
• Nevertheless, Jumbo Seafood Singapore, as a whole, still generated 1.2% y-o-y growth in revenue that year, with the expansion of space at the Riverside outlet. This was well above the overall performance of Singapore’s restaurant industry, which shrank 4%.
• We expect SSSG of Jumbo Seafood Singapore to be supported by the growth of tourist arrivals in Singapore. The new outlet at Changi Airport Jewel would allow the group to easily tap arriving tourists. At the new Ion Orchard outlets, Jumbo Group introduced Dim Sum and High Tea menus. We believe this would allow the store to cater to off-peak crowds.

Expect earnings to grow at 15% CAGR over FY18-21F.

• Besides revenue growth, we expect some margin expansion to boost earnings on the back of the following factors:
  1. Replacement of lower-margin brands and underperforming stores with higher-margin brands. In FY18, Jumbo Group closed down two of its Ng Ah Sio Bak Kut Teh outlets and one Jpot outlet; in FY19, the group closed the worst performing Jumbo Seafood outlet in Singapore at the National Service Resort & Country Club and closed its last Jpot outlet. These are replaced by two Jumbo Seafood restaurants at better locations and two Teochew restaurants, which we believe have better odds at achieving better margins.
  2. More franchisees. Based on its FY18 annual report other income breakdown, Jumbo Group received franchise income of SGD0.6m last year. We note that Jumbo Group has since reclassified franchise income under revenue as of FY19 and does not disclose this figure separately in the quarterly announcement. However, we expect franchise income to increase by c.SGD1m as a result of the one-off royalty fee coming from the granting of franchise rights to Le Xie F&B Management (Fuzhou Jumbo Seafood franchisee) and its JV company, JD F&B (South Korea Jumbo Seafood franchisee), as well as the increase in the number of franchisee stores. The bulk of this franchise income should flow directly to the bottomline.

Strong balance sheet

The group has no debt and a cash pile of SGD47m.

• Given that Jumbo Group is free cash flow positive and has a decent cash stash, we believe its historical dividend payout ratio of 70-75% is sustainable. The absence of debt also gives the group ample room to gear up for future M&A.

Capex.

• Over the last four years, Jumbo Group has typically spent approximately SGD6m on capex pa. We expect FY19 capex to expand to SGD9m. This is mainly due to the opening of Jumbo seafood restaurants and Teochew cuisine restaurants in Singapore, which are all wholly-owned by Jumbo Group and have a higher capex of c.SGD2m each vs its smaller brands like Ng Ah Sio Bak Kut Teh and its China Jumbo Seafood that is not 100% owned by the group.
• Post FY19, we think capex would normalise to SGD6m pa, as the group expands the store count of its smaller brands.

Key Risks

Surge in costs

• Manpower - Approximately one-third of Jumbo Group’s expenses go to manpower costs. The tightening of the foreign workers dependency ratio ceiling (DRC) in Singapore’s service sector would affect Jumbo Group. Effective 1 Jan 2020, Singapore would lower the DRC to 38% from 40% and the S Pass Sub-DRC to 13% from 15%. These would be further tightened to 35% and 10% on 1 Jan 2021.
• According to management, the current costs of hiring locals and foreign workers are similar, after including the levies and other benefits paid to foreign workers. As such, the company would look to hire more Singaporeans to mitigate the rise in costs.
• COGS. 40% of Jumbo Group’s total expenses go to COGS and 40-50% of Jumbo Group’s sales are derived from crabs. However, we think the increase in seafood costs would not have a significant impact on Jumbo Group as they are repriced daily based on market prices. Moreover, Jumbo Group has diversified its sources of suppliers to mitigate price increases.

Intensifying competition - Entrance of stronger F&B players.

• Singapore’s F&B industry is highly competitive. While Jumbo Group is currently one of the leading consumer foodservice retailers in Singapore, the continued entrance of strong F&B players such as the likes of Hai Di Lao would dilute Jumbo Seafood’s share of mind when it comes to dining choices for festivities or family occasions.

Exposure to the China market - Slowdown in China.

• Currently, Jumbo Group operates six Jumbo Seafood restaurants in China. China constitutes 20% of Jumbo’s sales and is currently loss-making. A slowdown in China’s economy, and decline in consumer confidence could lower sales and widen Jumbo’s losses in China.

Food safety and reputation risk

• While Jumbo Group has a long established reputation in Singapore, disease outbreak involving key food ingredients or food contamination would result in loss of consumer confidence with regards to particular food sold by Jumbo Group or Jumbo Group’s brand name. This would adversely impact Jumbo Group’s business and long-term reputation.
• Jumbo Group franchised out its Jumbo Seafood brand and Ng Ah Sio Bak Kut Teh brand to third parties. Lapses in quality of Jumbo Group’s business partners could also have a negative impact on Jumbo’s reputation.

Industry Overview

Rising affluence to motivate spending on food.

• Singaporeans have strong habits of forecasts Singapore’s per capita expenditure on food in the medium term.

The F&B industry is highly competitive in Singapore…

• According to Singstat, the number of Singapore has been fairly stable at 1,734 over the last five years due to manpower shortages and rising labour costs, firms are also more keen to open limited-service restaurants or smaller-sized cafés than full-service restaurants.

… but popular brands gain market share and survive tough times.

• Our channel checks on some of the Din Tai Fung, Hai Di Lao and Jumbo Seafood are still generating positive SSSG.
• According to Euromonitor’s 2018 data, BreadTalk’s Din Tai Fung is ranked No. 13rd position after Din Tai Fung and Hai Di Lao.

The tastier crab.

• We believe Jumbo could also be gaining market share from rival seafood restaurant operator, NO SIGNBOARD HOLDINGS LTD. (SGX:1G6), which has seen declining revenue in its restaurant segment.

Rising tourist arrivals provide an added boost.

• Chili crab is one of the must-try local delicacies for tourists coming into new outlet at Changi Airport Jewel to woo travellers.

Jumbo Group is one of the RHB's Top 20 Singapore Small Cap Companies - 20 Jewels 2019 Edition.

Juliana Cai RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-06-21

SGX Stock Analyst Report BUY INITIATE BUY 0.47 SAME 0.47