SINGAPORE Retail Market Monitor Wednesday, 25 November 2015 MONEY TALK BUY JUMBO GROUP (JUMBO SP) (Initiate Coverage) A Chilli-Hot Consumer Play Share Price S$0.365 Jumbo with its strong brand equity, is a key ambassador of Singapore’s popular Target Price S$0.49 chilli crab on a global level. Riding on its strong brand equity, Jumbo has Upside 34.2% enjoyed success in its initial entry into the Chinese market. As Jumbo expands its network of stores in China, investors can look forward to strong earnings growth and robust cashflow generation from this chilli-hot consumer play. COMPANY DESCRIPTION INVESTMENT HIGHLIGHTS Jumbo Group is a F&B provider with 14 F&B outlets in Singapore and 2 F&B outlets in • Initiate coverage with BUY and DCF-based target price of S$0.49. Of note, China currently operating under 5 restaurant Jumbo Group (Jumbo) had one of the strongest showing in terms of earnings growth, brands. return on equity and net margins among local peers in FY14. Jumbo has the highest FY16F return on equity of 24% vs its peers average of 15%. GICS sector Consumer Discretionary • Strong brand equity. Established in 1987, Jumbo is a household name in the local Bloomberg ticker: JUMBO SP restaurant industry. As a key ambassador of Singapore’s wildly popular chilli crab to Shares issued (m): 641.3 the international community, Jumbo has even attracted the likes of international Market cap (S$m): 234.1 Hollywood star, Reese Witherspoon during her recent visit to Singapore. Jumbo was Market cap (US$m): 165.5 also listed as one of the 50 iconic attractions to visit in Singapore by Tripadvisor for Singapore’s 50th anniversary. 3-mth avg t’over (US$m): 5.6 • Stable cost structure. As a result of its strong brand equity, Jumbo seafood is PRICE CHART considered a “dining destination” for consumers, meaning that Jumbo does not rely on impulse foot traffic (diners pre-plan their trips to Jumbo). As a result, all Jumbo (lcy) JUMBO GROUP LTD Jumbo Group Ltd/FSSTI Index (%) Seafood outlets are not located at shopping centres where rental increases have 0.45 180 170 eroded the margins of its peers. To manage labour issues, Jumbo manages a pool of 0.40 160 casual labour (enticing them with bonuses and flexible working hours), has a central 150 kitchen and employs technological upgrades, such as the usage of iPads to improve 0.35 140 130 productivity. As such, rental and labour as a percentage of total costs have remained 0.30 120 stable over the last few years. Of note, Jumbo enjoys higher profitability ratios of 10- 110 0.25 100 11% as compared to its peers of about 5% in the local restaurant segment. 90 0.20 80 • Strong cashflow generation. Sales transactions are usually conducted on a cash 100 basis. While Jumbo may extend credit terms to corporate clients such as tour Volume (m) agencies, contributions from these clients form less than 1% of total sales. As such 50 0 Jumbo has been able to generate very strong free cash flow of S$4m-13m from Nov 15 Nov 15 FY12-14. Management has stated their intentions to distribute at least 30% of its profits in FY16 and FY17, and this translates to a potential dividend yield of 2% Source: Bloomberg • China, the engine of growth. Despite its limited operating history in China (entered the market only in late 2013), we noted that Jumbo’s first outlet at iAPM, Shanghai, was ranked among the top five restaurants in the mall by consumers according to Dianping.com. Of note, we estimate that the outlet at iAPM has turned in positive ANALYSTS cashflow in six months, recouping the group’s investment just two/three years into its Andrew Chow, CFA operations. With the imminent opening of the third outlet in Shanghai in Jan 16, +65 6590 6633 Jumbo has identified China as its key engine of growth, and we believe there may be [email protected] plans to increase the number of outlets to 10 in the next 3 to 5 years Brandon Ng Chenhao, CFA KEY FINANCIALS +65 6590 6615 Year to 30 Sep (S$m) 2013 2014 2015F 2016F 2017F [email protected] Net Turnover 97.6 112.4 126.8 138.0 153.3 EBITDA 12.7 18.718.4 21.7 24.7 EBIT 10.0 15.515.3 19.1 20.7 PATMI 9.5 13.712.8 15.4 16.4 Adjusted PATMI 9.5 13.7 14.0 15.4 16.4 Adjusted EPS (cts) - - 2.2 2.4 2.6 Adjusted P/E - - 16.7 15.2 14.3 P/B (x) - - 4.5 3.7 3.1 Dividend Yield (%) - - - 2.0 2.1 Adjusted PATMI Margin (%) 9.8 12.2 11.0 11.2 10.7 Net Debt(cash) to Equity (%) - - (91.1) (72.9) (60.2) Interest cover (x) 498.5 508.6 459.4 487.5 453.5 Adjusted ROE (%) 24.1 26.4 26.7 24.2 21.6 Source: Bloomberg, UOB Kay Hian www.utrade.com.sg 1 SINGAPORE Retail Market Monitor Wednesday, 25 November 2015 Investment Highlights Strong brand equity. The chilli crab dish is one of Singapore’s signature dishes and it was even listed on CNN Go as one of the “World’s 50 Most Delicious Foods” in 2011. Established in 1987, Jumbo is a household name in the local restaurant industry and a key ambassador of Singapore’s wildly popular chilli crab to the international community. Jumbo has even attracted the likes of international Hollywood star, Reese Witherspoon during her recent visit to Singapore. Jumbo was also listed as one of the 50 iconic attractions to visit in Singapore by Tripadvisor for Singapore’s 50th anniversary. Stable cost structure. As a result of its strong brand equity, Jumbo seafood is considered a “dining destination” by consumers, meaning that Jumbo does not rely on impulse foot traffic to attract crowds to its restaurants (diners pre-plan their trips to Jumbo). As such all Jumbo Seafood outlets are not located at shopping centers where rental increases have eroded the margins of other food & beverage (F&B) players. To manage labour issues, Jumbo also manages a constant pool of casual labour by enticing them with bonuses, flexible working hours ), has a central kitchen and adopts technology such as iPads to improve productivity. As such, rental and labour as a percentage of total costs have remained relatively stable over the last few years. As a result of its stable cost structure, we note that Jumbo enjoys one of the highest net profit margins among its local peers. Jumbo enjoys higher profitability ratios of 10-11% as compared to its peers of about 5% in the local restaurant sector according to Singapore Department of Statistics (please refer to pg 9). Strong cashflow generation. Sales transactions are usually conducted on a cash basis. While Jumbo may extend credit terms to corporate clients such as tour agencies, revenue contributions from these clients form less than 1% of total sales. As such Jumbo has been able to generate very strong free cash flow of S$4m-13m (S$0.007-S$0.02/share) from FY12-14. While Jumbo does not have any fixed dividend policy, management intends to distribute dividends of at least 30% of its profits in FY16 and FY17, which we think this is sustainable given the group’s strong cash flow generation. Based on our FY16 and FY17 net profit forecasts, this could translate to a potential dividend yield about 2.0% China, the engine of growth. Jumbo entered the Chinese market through a (Jumbo) 70:30% JV with Breadtalk in 2013, and has received very positive feedback from local media and consumers. Despite its limited operating history in China, Jumbo’s first outlet at iAPM, - Shanghai, has been ranked among the top five restaurants in the mall by consumers according to Dianping.com. Of note, Jumbo’s outlet at iAPM has outperformed expectations, and we estimate that it has turned in positive cashflow in six months, recouping the group’s investment two/three years into operations. Riding on the success of its first outlet at iAPM, Jumbo’s second outlet at Raffles City, Shanghai, has also received very positive feedback possibly due to its location (in a more mature mall) and higher brand awareness following Jumbo’s success at iAPM. We expect Jumbo’s profit to grow in FY16, driven by a full-year contribution from its second outlet at Raffles City, Huang Pu, Shanghai (which opened in Aug 15) and its third outlet at IFC mall, at Pu dong, Shanghai which will be opening in Jan 16. We estimate each new outlet to contribute about S$0.6-0.8m to profit in its steady state. www.utrade.com.sg 2 SINGAPORE Retail Market Monitor Wednesday, 25 November 2015 Valuation We initiate coverage on Jumbo with a BUY recommendation and DCF-based target price of S$0.49. Our target price has an implied FY16F PE of 20.5x, which is at a premium to its regional and peers’ average of 15.5x. However we think that the premium is justifiable given Jumbo’s positive expansion plans in China, and strong brand equity. Of note, Jumbo also has one of the highest free cashflow generation, return on equity and net margins among local peers. Jumbo has the highest FY16F return on equity of 24% vs its peers average of 15%. Our assumption is based on four new store openings in Shanghai, China from FY17-20, in accordance with the group’s intention to open at least four new outlets in China and/or Singapore in the next 24 months.