SINGAPORE (Jan 4): Maybank Kim Eng is maintaining its “buy” call on Jumbo Group with a target price of 70 cents, implying 26 times FY18 earnings, which is on par with its regional peers.
The research house recently hosted a non-deal roadshow (NDR) for Jumbo in Singapore, where key discussions included the group’s franchising growth strategy, expansion growths in China and operational updates.
In a Thursday report, analyst John Cheong notes Jumbo’s plans to accelerate its expansion business via franchising from FY18 onwards by upping its outlets per year to four from one previously. This comes on expectations for the franchising business to contribute to more than 20% of earnings from 0% currently within the next three to five years.
“Jumbo has managed to build a reputable brand name in China due to its high exposure to Chinese tourists in Singapore and established presence in China (c.5 years). This has helped to achieve profitability in less than 3 months, from 9-12 months previously. It aims to open more outlets within and beyond its home cities of Shanghai and Beijing. Other cities under consideration include Shenzhen, Xi’an, Chengdu and Nanjing,” he adds.
Further, Cheong highlights that the new Jumbo Seafood outlet, which recently opened in Taiwan in Dec 2017, has shown “excellent performance” with a “full house almost every day”, which he attributes to extensive media coverage on the outlet as well as good location.
He also notes that business at Jumbo’s new outlet in Shanghai has been picking up after a slow start, which was due to the lack of marketing and a less visible location as compared to the one in Taiwan.
Looking ahead, Cheong sees upside in better-than-expected Singapore and China sales, especially from the new outlets, while pointing out that lower-than-expected food and staff costs could lead to better margins.
Downsides risks include any changes in China’s food-safety laws that could affect China’s imports of mud crabs; shortage of critical ingredients for Jumbo’s signature dishes; epidemics or health scares; and poor execution of the group’s expansion strategy, including major delays in restaurant openings or longer-than-expected breakeven of new outlets.
As at 12.24pm, shares in Jumbo are trading 1 cent higher at 60 cents.
