CFA Society Singapore
SINGAPORE (Oct 10): UOB Kay Hian is keeping restaurant chain operator Jumbo Group at “hold” with an unchanged target price of 60 cents despite noting that the group is on track with its expansion plans, with more potential joint venture (JV) and franchise opportunities ahead.
This is due to the stock’s current share price of 63 cents, as opposed to the research house’s recommended entry price of 54 cents.
In a Monday report, analysts Nicholas Leow and Andrew Chow say they continue to view Jumbo as a “strong cash-generative consumer play with defensive characteristics”.
They further explain that their given target price, which is currently at a 51% premium to that of local and regional peers, is justifiable given the group’s stable cost structure, strong brand equity, successful China expansion thus far, and above-peer return on equity (ROE).
Last week, the group completed of its expansion plans of introducing an additional 3,500 sf of space and 150 more seats to its Riverside outlet. This has led the analysts to believe the outlet will now “cater to the needs of corporate customers” given its new VIP rooms and corporate/event tables, as well as proximity to the Central Business District (CBD).
At the same time, it also announced the opening of its fifth Ng Ah Sio Bak Kut Teh outlet at Resorts World Sentosa. According to the analysts’ channel checks, the establishment has “received a positive response, with it seeing long queues and the majority of customers being foreign tourists”.
Through the new Ng Ah Sio Bak Ku Teh outlet, Jumbo aims to generate more cost savings by reducing the outlet’s manpower needs by about 30% through employing just eight personnel and utilising technological features such as self-ordering systems.
Such a concept could be rolled out to other establishments under the Jumbo umbrella and can “go a long way in coping with rising manpower costs”, say the analysts.
Going forward, they believe potential JV and franchise opportunities may be next for the group.
“Jumbo has indicated its intention to continue to explore suitable opportunities through acquisitions, JVs or strategic alliances with parties who can strengthen the group’s market position. We take this as an indication that Jumbo intends to explore franchising opportunities
in the region to leverage on its strong local brand equity,” opine Leow and Chow, who expect franchising opportunities to come from mainly Vietnam, and possibly markets such as Indonesia and Thailand.
“This would create recurring revenue streams through franchise fees and percentage of sales revenue from franchisee partners.”
As at 11:32am, shares of Jumbo are trading flat at 63 cents.