March 3, 2016 Jumbo Group Ltd (JUMBO SP) BUY Share Price SGD 0.45 Leveraging Up In China 12m Price Target SGD 0.58 (+29%) Previous Price Target SGD 0.58 Company description Reiterate Buy F&B retailer in Singapore and China, most famous for We remain bullish on Jumbo, especially as all indications are for a its chilli crabs and JUMBO Seafood brand. Has five surging China business this quarter. Our analysis of its IAPM outlet other brands in its stable. suggests strong operating leverage that should increasingly be in Jumbo’s favour and should show up in the numbers soon. Despite two new outlets, China only had a small loss in 1Q16. With strong sales so far in Statistics 2Q16, it could be in the black as soon as this quarter. Reiterate BUY on 52w high/low (SGD) 0.49/0.41 Jumbo, with TP of SGD0.58, based on a blended PE/DCF methodology. 3m avg turnover (USDm) 2.2 Free float (%) 24.3 Operating Leverage In Jumbo’s Favour Issued shares (m) 641 Market capitalisation SGD282.2M Consumer Staples We expect operating leverage to work to Jumbo’s advantage in China in USD202M coming years. We estimate IAPM’s operating leverage to be 3.3x. In other Major shareholders: words, every 10% rise in sales will lead to 33% higher profits. All JBO Holdings 57.9% indications now are of a buoyant topline. As sales ramp up, the high Mr Tan Gee Jian 6.6% operating leverage will lead to rising profits for every incremental dollar Orchid 1 Investments 6.2% of sales. This means Jumbo’s potential to outperform is very high. Price Performance 0.480 180 China Could Be In The Black This Quarter 0.460 170 Despite having two brand-new outlets, China only posted a small loss of 0.440 160 Singapore c.SGD100k in 1Q16 as IAPM alone was able to almost cover their start-up 0.420 150 costs. With management reporting strong sales over CNY and most 0.400 140 0.380 130 critically — even after CNY ended — for all three outlets, China could 0.360 120 turn profitable as soon as 2Q16. This will be a key catalyst to look out for 0.340 110 when they report 2Q results. 0.320 100 0.300 90 IFC Outlet Delivering On Bullish Expectations Nov-15 Nov-15 Dec-15 Jan-16 Feb-16 Feb-16 Jumbo Group Ltd - (LHS, SGD) Jumbo Group Ltd / Straits Times Index - (RHS, %) Management reported that the latest IFC Mall outlet in Pudong, which opened before CNY, is full-house even post-CNY and on weekends as -1M -3M -12M well. More critically, average bill per diner at this outlet is CNY368, 10% Absolute (%) 6 5 na higher than IAPM Mall and 35% higher than Raffles City, as we expected. Relative to index (%) (1) 11 na We are encouraged by IFC’s direction and continue to expect a relatively Source: FactSet shorter time to profitability for it. FYE Sep (SGD m) FY14A FY15A FY16E FY17E FY18E Revenue 112 123 143 156 174 EBITDA 19 18 22 24 29 Core net profit 13 14 15 17 20 Core EPS (cts) 2.1 2.1 2.3 2.6 3.1 Core EPS growth (%) 39.8 3.0 8.3 11.6 21.3 Net DPS (cts) 0.0 8.1 0.7 0.8 0.9 Core P/E (x) 21.6 21.0 19.4 17.4 14.3 P/BV (x) 6.1 5.1 4.6 3.9 3.2 Net dividend yield (%) 0.0 17.9 1.5 1.7 2.1 ROAE (%) 31.8 26.4 24.9 24.2 24.5 ROAA (%) 20.8 17.8 16.9 16.7 17.3 EV/EBITDA (x) na na 10.7 9.8 7.8 Net debt/equity (%) net cash net cash net cash net cash net cash Consensus net profit - - na na na MKE vs. Consensus (%) - - na na na Gregory Yap [email protected] (65) 6231 5848 SEE PAGE 9 FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS Co. Reg No: 198700034E MICA (P) : 099/03/2012 Jumbo Group Ltd 1. Year-Round High Season In China 1.1 Operating Leverage Should Work to Jumbo’s Advantage… As Jumbo’s China outlets ramp up and turn increasingly mature, we think profits will start to benefit exponentially from the high fixed cost base. This is due to its high degree of operating leverage. Using the IAPM Mall outlet as an example, which is Jumbo’s only mature outlet at this stage of its expansion into China, Jumbo earns a large variable profit of 55% on each incremental dollar of sales, but must achieve sufficient sales to cover its substantial fixed costs. If it can do so, it will start to earn a major profit on all sales once it has paid for its fixed costs, which are estimated to account for 38% of revenue. We calculate IAPM’s operating leverage to be 3.3x. In other words, every 10% rise in revenue results in a 33% increase in profits. Figure 1: Operating leverage of IAPM Mall outlet is 3.3x. In other words, every 10% rise in revenue raises profit by 33% FY15 suggests For FY16, we assumed CNY300 bill/diner CNY335 bill/diner (+12%) CNY335 bill/diner CNY335 bill/diner (CNY’000) & 1.8 turns/night & 2 turns/night & 2.5 turns/night & 3 turns/night Revenue 49,176 60,300 75,375 90,450 YoY % chg from FY15 +23% +53% +84% Variable costs: (22,129) (27,135) (33,919) (40,703) - Food costs (14,753) (18,090) (22,613) (27,135) - Utilities cost (2,459) (3,015) (3,769) (4,523) - Other opex (4,918) (6,030) (7,538) (9,045) Contribution margin 27,047 33,165 41,456 49,748 As % of revenue 55% 55% 55% 55% Fixed costs: (18,817) (18,817) (18,817) (18,817) As % of revenue 38% 31% 25% 21% - Depreciation (1,567) (1,567) (1,567) (1,567) - Rental costs (16,170) (16,170) (16,170) (16,170) - Staff costs (1,080) (1,080) (1,080) (1,080) EBIT 8,230 14,348 22,639 30,930 YoY % chg from FY15 +74% +175% +276% Operating leverage is contribution margin divided by EBIT. Detailed model in Appendix A. Source: Company data, Maybank Kim Eng 1.2 …And Raises The Potential To Beat Forecasts The high operating leverage means that it will not take much for Jumbo to potentially exceed our forecasts, by our estimates. We currently forecast China will contribute c.SGD2m to pretax profits in FY16, with IAPM to account for 64% or SGD1.4m, based on an average bill/diner of SGD71/CNY335, +12% from FY15’s SGD65/CNY300 as indicated by management. FY15 data also suggested an average nightly turn of 1.8 diners per seat. We have assumed 2 turns in FY16. However, if Jumbo is able to raise its seat turns to 2.5x, IAPM’s profit alone could exceed SGD2m in FY16E, and if the other two outlets also turn profitable within FY16 as we expect, Jumbo’s China business could beat our forecasts. According to management, IAPM’s seat-turns are higher than Singapore’s, especially since it is located in a late-night mall where shops stay open till 11pm and restaurants only close at midnight or later. Figure 2: High operating leverage in China could help Jumbo beat forecasts (SGD’000) 2016E % of FY16E forecast Forecasted China profit contributions from all three outlets 2,144 IAPM outlet alone - assume CNY335 bill/diner, 2 turns/night 1,374 64% IAPM outlet alone - assume CNY335 bill/diner, 2.5 turns/night 2,168 101% IAPM outlet alone - assume CNY335 bill/diner, 3 turns/night 2,961 138% Source: Maybank Kim Eng March 3, 2016 2 Jumbo Group Ltd 1.3 Look Out For More China Traction in 2Q As such, we think there is a good chance that China could turn profitable as a whole in 2Q16 for Jumbo. At the least, it should be very close to breaking even. Already in 1Q16, the China operations turned in SGD3.1m in revenue (+79% YoY) and lost only c.SGD100k. And this was with just the one profitable outlet at IAPM Mall supporting the start-up and pre-operating costs of two new outlets in Raffles City Shanghai and IFC Mall Pudong, which opened in Aug 2015 and Jan 2016 respectively. IFC Mall’s pre-operating cost alone was c.SGD200k in 1Q16. All three outlets have continued to do well so far in 2Q16. IFC Mall opened two weeks before CNY to take full advantage of the festive demand. We understand that business has remained strong even after CNY ended. We reiterate that we expect a relatively shorter time to profitability for IFC due to the higher spending power of its target market, which are business diners. According to management, IFC was full-house even on weekends. On www.dianping.com (China’s equivalent of www.hungrygowhere.com, a popular Singapore food review website), we note that the average customer review of all three Shanghai outlets has remained in five-star territory and the number of reviews has risen significantly since our initiation in early Jan. IFC Mall, despite being opened for only a short time, has already garnered 124 reviews. Further, its average per pax spend is CNY368, according to dianping, higher than Raffles City’s CNY272 and IAPM’s CNY334, which is as we had expected since the IFC outlet caters to the bigger-wallet business crowd.