Time for Tasty Re-Rating Share Price SGD 0.58 12M Price Target SGD 0.70 (+22%) Previous Price Target SGD 0.66
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December 12, 2017 Jumbo Group Ltd (JUMBO SP) BUY Time for Tasty Re-Rating Share Price SGD 0.58 12m Price Target SGD 0.70 (+22%) SGD 0.66 Previous Price Target Company Description Expansion catalysts; BUY We resume coverage of JUMBO with a contrarian BUY and DCF TP of F&B retailer in Singapore and China, most famous for its chilli crabs and JUMBO Seafood brand. Has five SGD0.70 (WACC 9%). Our TP implies 26x FY18E EPS, on par with regional other brands in its stable. F&B peers. Leveraging its reputation and consistent quality, JUMBO aims to open 4-5 new outlets a year in FY18-20E, up from just one historically. Rapid profitability in just one month for its Beijing outlet opened in Jul Statistics 2017 demonstrates the Chinese consumer’s confidence in its brand and 52w high/low (SGD) 0.78/0.54 JUMBO’s execution ability, in our view. We expect catalysts from a 3- 3m avg turnover (USDm) 0.4 year EPS CAGR of 15%, backed by: 1) more new outlets; 2) low upfront Free float (%) 18.2 costs for expansion through JVs and franchises; and 3) operating Issued shares (m) 641 leverage. Risks include execution missteps or delays. Market capitalisation SGD368.9M Consumer Staples USD273M More new stores in China, Taiwan & Vietnam Major shareholders: JUMBO has gained a foothold in China with its consistent quality. China JBO Holdings Pte Ltd. 57.9% contributed 18% or SGD25m to its FY17 revenue, up from 6% or SGD7m in SIM CHYE HOCK 10.0% FY14. We expect contributions to exceed 30% by FY20E. Since 2014, TAN GEE JIAN 6.6% JUMBO has been adding one new outlet a year. Outside China, it now Price Performance aims to expand through franchises and JVs, which should allow it to 0.800 280 harness the strength of its value-adding partners and reduce upfront 0.750 260 costs. It started its first franchise in Vietnam in May 2017. It plans to 0.700 240 Singapore open a second in Hanoi with a local F&B partner. It has formed a JV and 0.650 220 franchises to open at least eight outlets in Taiwan. On top of that, it has 0.600 200 identified five other potential markets: Thailand, Indonesia, Hong Kong, 0.550 180 Macau and Korea. 0.500 160 0.450 140 Foundation laid for new EPS growth 0.400 120 0.350 100 EPS growth should resume in FY18E, from more new outlets overseas and Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 operating leverage to cover additional head-office costs since FY17. To support its regional expansion, JUMBO had shifted to bigger head offices Jumbo Group Ltd - (LHS, SGD) Jumbo Group Ltd / Straits Times Index - (RHS, %) in Singapore and China in FY17. Most start-up costs had been recognised, -1M -3M -12M when two new outlets in China were opened in late FY17 and early FY18. Absolute (%) (4) 6 (8) Undervalued despite superior ROEs & net margins Relative to index (%) (4) 0 (21) JUMBO trades at 21x FY18E EPS, a discount to regional peers’ 26x, Source: FactSet despite its superior ROEs and margins. We use DCF valuation to capture the full value of its expansion potential that could materialise over more than a year. Our TP implies 26x FY18E EPS, on par with regional peers. Fast adding new Jumbo seafood outlets to boost earnings Singapore outlets China outlets FYE Sep (SGD m) FY16A FY17A FY18E FY19E FY20E (No.) (SGD m) Taiwan outlets Franchise outlets Revenue 137 145 164 189 208 25 25 Core earnings (RHS) 22.3 EBITDA 22 22 26 30 33 20.0 22 Core net profit 16 14 17 20 22 20 4 20 Core EPS (cts) 2.4 2.3 2.7 3.1 3.5 17.4 18 Core EPS growth (%) 32.0 (6.7) 20.1 14.8 11.7 15.5 14.5 13.8 3 4 Net DPS (cts) 1.7 1.7 1.9 2.2 2.4 15 13.3 14 15 2 Core P/E (x) 23.8 25.5 21.2 18.5 16.5 2 P/BV (x) 5.7 5.7 5.2 4.8 4.4 10 1 Net dividend yield (%) 3.0 3.0 3.3 3.8 4.2 10 8 1 7 8 10 ROAE (%) 25.5 22.3 25.6 27.2 27.9 6 4 ROAA (%) 18.3 17.1 19.8 20.5 20.8 2 3 5 1 5 EV/EBITDA (x) 15.0 14.5 12.0 10.9 9.8 6 6 Net gearing (%) (incl perps) net cash net cash net cash net cash net cash 5 5 5 5 5 Consensus net profit - - 17 18 18 0 0 MKE vs. Consensus (%) - - 3.9 8.3 22.5 FY14 FY15 FY16 FY17 FY18E FY19E FY20E Source: Company, Maybank Kim Eng John Cheong, CFA [email protected] (65) 6231 5845 THIS REPORT HAS BEEN PREPARED BY MAYBANK KIM ENG RESEARCH Co. Reg No: 198700034E MICA (P) : 099/03/2012 SEE PAGE 23 FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS Jumbo Group Ltd 1. Investment Summary Accelerating growth in traditional markets: Singapore and China JUMBO is a leading restaurant operator in Singapore, which accounts for more JUMBO aims to open more stores starting in FY18 than 80% of its revenue. Signature dishes at its eponymous seafood restaurants (Year ended Sep) FY16 FY17 FY18E FY19E FY20E are the Singapore chilli crabs and black-pepper crabs. After entering China in Additional no. of outlets 1 3 5 4 4 Total 17 20 25 29 33 2013, China has become its star market. China contributed 18% to its FY17 Jumbo (total) 8 10 14 18 22 revenue, up from just 6% in FY14. After building up its brand, local knowledge - Singapore 5 5 5 6 6 and connections in its first city, Shanghai, JUMBO is turning more aggressive. It - China 3 4 6 7 8 - Taiwan (JV/franchise) 1 2 4 has moved out to Beijing, with plans to open more than one outlet a year in - Franchise 1 2 3 4 China. We expect JUMBO to open two new outlets in China in FY18E, which could Ng Ah Sio Bak Kut Teh 4 6 7 7 7 lift China’s revenue contributions beyond 30% in FY20E. Singapore remains its Chui Huay Lim Teochew 1 1 1 1 1 JPOT 3 2 2 2 2 cash cow, at more than 80% of group revenue in FY17. Singapore’s typical Jcafe 1 1 1 1 1 revenue growth of 4-11% YoY pa slowed to just 2% in FY17, caused by the closure Source: Company, Maybank Kim Eng of a JPOT outlet at Parkway Parade. We expect a return to high-single-digit growth from FY19, when JUMBO opens two new outlets: one Ng Ah Sio Bak Kut Teh in FY18 and one Jumbo seafood in FY19. Entering new markets with low-risk, low-cost JVs & franchises Beyond its traditional markets, JUMBO aims to form franchises and JVs in other Asian markets. It started its first franchise in Vietnam in May 2017. It plans to open a second in Hanoi with a local F&B partner. It has formed a JV and franchises to open at least eight outlets in Taiwan. We expect one new outlet in Taiwan each in FY18-19E, followed by two more pa in the next three years after gaining market familiarity. JVs and franchises should reduce the risk of failure for JUMBO as it harnesses the strength of its value-adding partners and cut upfront costs. JUMBO will receive 3-5% of revenue from its franchisees and a 49% share of earnings from its JV outlets. It has identified five other potential markets: Thailand, Indonesia, Hong Kong, Macau and Korea. There is also potential to scale up non-Jumbo brands, including Ng Ah Sio Bak Kut Teh and Chui Huay Lim Teochew cuisine. Foundation laid for new EPS growth In FY17, JUMBO incurred considerable upfront costs for its regional expansion. It shifted to bigger head offices in Singapore and China and added headcount. The bulk of its upfront costs for two new China outlets was also incurred in FY17. These were opened in late FY17 and early FY18. Starting FY18E, we believe earnings growth will resume, from: 1) more new outlets overseas; and 2) operating leverage to cover increased head-office expenses. Undervalued JUMBO trades at 21x FY18E P/E, a discount to domestic peers’ 24x average. But we believe these are not good comparables due to Singapore’s smaller market. We think regional peers provide better comparisons, especially in view of JUMBO’s regional-expansion plans. They trade at 26x on average. Despite range- topping ROEs and margins, JUMBO trades at discounts to these peers. Our DCF TP of SGD0.70 implies 26x FY18E EPS, on par with them. We believe our valuation is conservative, as we have assumed 1x beta vs Bloomberg’s 2-year beta of 0.6x to account for execution risks in its aggressive overseas expansion. December 12, 2017 2 Jumbo Group Ltd 2. Focus Charts Fig 1: Outlets to accelerate from FY18E onwards Fig 2: China is JUMBO’s chief source of growth. Its revenue contributions could exceed 30% by FY20E. (No.) (SGD m) 35 33 Singapore China Others (Taiwan & Vietnam) 250 29 30 25 200 2 25 1 20 Thousands 41 (25%) 64 (31%) 25 (18%) 54 (29%) 20 17 150 20 (15%) 16 10 (9%) 15 100 10 134 142 117 119 122 50 112 5 0 0 FY15 FY16 FY17 FY18E FY19E FY20E FY15 FY16 FY17 FY18E FY19E FY20E Source: Company, Maybank Kim Eng Source: Company, Maybank Kim Eng Fig 3: Gross margins to expand with scale and automation.