Jumbo Group Ltd Buy: S$0.64 (+20.8%)

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1 Analysts Lei Yuchong Director, Equity Research Ryan Soh Deputy Director, Equity Research Basic Information Last Closed Price S$ M Target Price S$0.64 +/- Potential +20.8% Bloomberg Ticker JUMBO SP Equity GICS Sector Consumer Discretionary GICS Sub-Industry Restaurants 1Y Price v Relative Index Company Description Jumbo Group Ltd is a seafood restaurant group offering multiple brands and dining concepts catering to all consumers. The Company has a presence in,, Vietnam and Taiwan. Key Financials Market Cap S$340.17M Basic Shares O/S M Free Float 30.1% 52-Wk High-Low S$0.64- S$0.50 Fiscal Year End 30-Sep-18 (S$ M) FY15A FY16A FY17A FY18E Revenue Gr Rate (%) EBITDA Margin (%) Net Income Margin (%) ROA ROE P/E P/B Key Executives Tan Cher Liang Ang Kiam Meng Tay Peng Huat Independent Chairman CEO & Executive Director Chief Financial Officer Jumbo Group Ltd Buy: S$0.64 (+20.8%) Equity Research Department 9 July 2018 Sumptuous Seafood Story We are initiating coverage of Jumbo Group Ltd with a Buy rating and a S$ M price target. 2Q18 Earnings Review Revenue increased 6% Yoy to $41.7 million, driven by contributions from newly opened Jumbo Seafood outlets in, which commenced operations in 2017 Net profit declined 27% yoy to $4.2 million, mainly due to higher cost of sales and operating expenses resulting from expansion efforts, which is partially offset by an increase in other income Partial decline in gross margin from 63.9% to 63.3% owing to higher seafood costs Investment Thesis Chinese market to drive future growth trajectory: We believe that Jumbo will continue to open one new outlet per year on average in the PRC. We forecast the Group s Chinese outlets to contribute 37% of revenue by 2022, up from 17.5% in 2017 Franchise plans yet to be fully priced in: Jumbo has plans for up to 32 franchised outlets in 7 countries. With 3 franchise agreements signed so far and 2 franchised outlets opened, we see ample potential for rapid expansion as management continues inking new franchise contracts overseas Regional expansion supported by wide economic moat: Jumbo s strong and unique branding is associated with authentic an cuisine and is one that is not easily replicated. Brand equity is further supported by the spill-over effect from tourism to Solid balance sheet lays groundwork for growth: Expansion plans are backed by a sturdy debt-free financial position and strong cashflows stemming from a highly cash-generative business model. Significant insider ownership demonstrates strong alignment of interests with shareholders Catalysts Upside surprise in next quarter earnings, given muted earnings over the past 2 quarters which were weighed by expansion costs Successful launch of franchise restaurants along with signing of new franchise agreements with regional partners could trigger upward re-rating Valuations Our 12-month price target of S$0.64 is derived from a blended DCF and forward-p/e valuation approach, valuing Jumbo at a forward FY18E P/E of 22.5x. This is a slight premium to the industry average appropriate in our view, given Jumbo s stronger growth trajectory and branding. Key Risks Disruptions to raw materials supply: Dependence on external suppliers for raw materials, primarily seafood, exposes Jumbo to fluctuations in supply and prices of ingredients Local manpower crunch: Labour-intensive F&B industry vulnerable to manpower shortages that could crimp profit margins Renminbi depreciation: Jumbo s increasing exposure to the Chinese market exposes it to currency risk in the event of a sharp depreciation of the RMB

2 Figure 1. Synonymity of the Jumbo brand name with chilli crabs Source: MoneyDigest Figure 2. Revenue breakdown by brand, FY17 Company Overview Established in 1987 with its first Jumbo Seafood outlet at East Coast Seafood Centre, Jumbo Group has grown from strength to strength into an established regional F&B brand. Synonymous with its famous chilli crabs that are popular with locals and tourists alike, Jumbo Group s stable of F&B establishments comprises 5 brands - Jumbo Seafood, Ng Ah Sio Bak Kut Teh, JPOT, Chui Huay Lim Teochew Cuisine and J Cafe, with a total of 14 outlets in. The Group debuted on the Catalist board following its November 2015 IPO. Faced with limited growth in the domestic market, Jumbo Group has embarked on a regional expansion effort, beginning with its maiden foray into with the opening of the first Jumbo Seafood restaurant in Shanghai in The Group has since continued to pursue expansion into the Chinese market, establishing 5 more outlets, with the latest outlet in Xi an beginning operations in May The Group has also set its sights on other regional markets, having already inked franchise agreements with regional partners to establish Jumbo Seafood outlets in Vietnam, Taiwan and Thailand, with plans to franchise outlets in several other countries in the region. At home, the Group continues to focus on nurturing its portfolio of brands focused on local cuisine, opening its fourth Ng Ah Sio Bak Kut Teh outlet in Resorts World Sentosa in It also seeks opportunities to introduce foreign F&B concepts to, the latest being a partnership with Tsui Wah Holdings in a 49:51 JV to expand the Hong Kong-style casual tea restaurant ( Cha Chaan Teng ) concept under the Tsui Wah brand, with the first outlet opening at Clarke Quay in June Source: Company Investor Presentation June 2018 Figure 5. Jumbo Group s directly-managed outlets Figure 3. Jumbo Group s stable of F&B brands Source: Company Figure 4. The first Tsui Wah outlet at Clarke Quay in Sources: Company Presentations, Company Annual Reports 2Q18 Earnings Review Source: The Business Times Revenue grew 6.0% yoy to $41.7m (2Q17: $39.4m), driven by contributions from newly opened Jumbo Seafood outlets in Beijing and Shanghai which started operations in July and November 2017 respectively 1

3 Figure 6. GDP per Capita growth, 2013 to 2017 Source: TradingEconomics Figure 7. Total tourism receipts and tourist F&B expenditure for, Source: Tourism Board Figure 8. Tourist arrivals from countries in Jumbo s expansion pipeline Cost of sales increased 7.8% yoy to $15.3 million, with gross margins declining to 63.3% (2Q17: 63.9%) owing to higher seafood costs Operating expenses increased 18% yoy to $22.7m in line with expansion efforts, mainly attributed to staff costs increasing 26% due to rising manpower needs in and Operating profit declined 26.7% yoy to $5.0m and operating margins fell to 12% (2Q17: 13%) Net profit declined 27% yoy to $4.2 million on the back of higher cost of sales and expansion costs, partially offset by an increase in other income Industry Outlook Rising disposal incomes fuel ans food obsession amidst stiff industry competition in Food Paradise With one of the highest GDP per capita in Asia at US$55,235 in 2017, the an obsession with food can be attributed to high levels of disposal incomes. Boasting a vibrant F&B landscape with cuisine offerings from the world over, compounded by hectic lifestyles and a fast pace of life, time-strapped ans spent up to a total of S$9.02bn each year on eating out, with restaurants taking a 37.5% (S$3.38bn) of operating receipts. This looks set to continue as disposal incomes rise alongside a growing economy. The island s position as a tourism hub has attracted numerous overseas F&B retailers to set up shop, leveraging on its strategic location to increase exposure to a global consumer base while enjoying stable sales owing to ans high purchasing power. This has intensified competition within the industry, with F&B players competing for the consumer dollar by offering novel new dining concepts. Tourism boom to fuel spending on F&B and expose foreigners to local brands Tourist arrivals have grown at a CAGR of 2.9% since 2013 to hit 17.4m in 2017 and have grown 6.7% yoy for Jan-Apr F&B tourism receipts have remained stable at ~10% of total tourism receipts, increasing at a CAGR of 5.9% from S$1.6bn in 2008 to S$2.7bn in 2017, in line with rising visitor numbers. Source: Tourism Board Figure 9. Food industry Business Cost breakdown According to the MasterCard Global Destination Cities Index for 2016, emerged top among 132 cities in terms of tourism spending, with tourism receipts reaching US$15.7 billion, and emerged 2nd among in terms of number of visitors. s international standing is expected be boosted by the occurrence of major key events such as the Trump-Kim Summit, alongside the government s push to boost s position as a tourism hub with its airport expansion plans and efforts to rejuvenate Orchard Road, s key shopping belt. Enhanced international recognition is expected to attract corporate travellers and tourists alike to, providing further upside to the tourism industry, with expected trickle-down effects on F&B industry. Key headwinds in tight labour market and high rents Source: Department of Statistics, Labour remains a key component in the F&B industry, accounting for 29.3% of industry operating expenditure in

4 Figure 10: Summary of Food Industry Transformation Map However, finding locals willing to work in the F&B industry remains an uphill task, forcing F&B companies to pay higher salaries and rely on foreign labour to make up for the shortfall. The government has mandated F&B businesses to hire at least 6 local employees before they can hire 1well foreign employee. Businesses also incur foreign worker levies of SG$ per head. This has increased the cost of labour and put pressure on the industry s margins. The Food Services Industry Transformation Map was introduced in response to the labour crunch, encouraging adoption of technology and providing skills-upgrading programmes. Under these schemes, companies such as Jumbo Group and Breadtalk have opted to invest in central kitchens and automation of parts of the food production process, resulting in cost and manpower savings while improving operating efficiency. Attractive growth opportunities in Chinese F&B Source: The Straits Times Figure 11. Chinese disposal income and food expenditure, 2016 to 2022 With a consumer base of more than 1.3 billion people rapidly gaining affluence, the humongous Chinese market offers much potential for F&B expansion. According to Euromonitor, Chinese disposable income has grown at a CAGR of 6.8% from 2012 to Expenditure on food has also increased along with income, growing at a CAGR of 5.4% from The increased expenditure has clearly benefited the F&B industry in, with sales in fill service restaurants growing 7% to hit CNY3.3 trillion in This trend is expected to continue as Chinese disposal incomes are forecast to grow at a CAGR of 5.8% from 2017 to Porter s 5 forces Source: TradingEconomics Figure 12. Porter s 5 forces Source, NUS Investment Society Estimates Threat of Substitutes - Low The Jumbo brand name is nearly synonymous with authentic an cuisine in key markets such as. Even though copycat food outlets serving the same cuisine have already sprung up, Jumbo s well-established and unique brand image gives it a formidable economic moat and its restaurants continue to attract customers. Having established its first outlet in 31 years ago, the strong branding also retains to a loyal local customer base. Bargaining Power of Suppliers - Low Jumbo s suppliers of raw materials, primarily seafood, originate from across Southeast Asia, such as Indonesia and The Philippines, where the industry is fragmented with numerous suppliers. Prices are established by market forces and individual suppliers are unable to significantly influence prices nor control a large market share. Threat of New Entrants - Low Although the industry has low barriers to entry, new entrants require large capital investments to match Jumbo s scale of operations. New entrants also have to vie for manpower in a tight labour market and fork out high rents to secure outlets in strategic locations. Building up a brand image and industry reputation to rival Jumbo s would also require copious resources and time. New entrants are therefore unlikely to gain significant market share in the short term. Competition Within the Industry - High Patrons are spoilt for choice given the F&B industry s diverse variety of cuisines. Industry players often resort to offering innovative food products that cater to consumers specific preferences. Major established players have nurtured their niches within the space and have become famous for their speciality cuisine. 3

5 Figure 13. Notable restaurant brands in serving similar cuisine Source: NUS Investment Society Figure 14. No Signboard Seafood is Jumbo s closest competitor albeit with weaker branding As novel ideas constantly emerge in the F&B industry, Jumbo has to constantly innovate to better cater to customers needs, while pursuing a diversification strategy by developing other brands in its stable. Bargaining Power of Buyers - Medium With its namesake nearly synonymous with chilli crab, a national dish in, Jumbo has the upper hand in terms of pricing power. However, with other industry players such as No Signboard seafood offering similar F&B experiences, alternatives confer consumers a degree of bargaining power as well. SWOT Analysis Strengths Strong branding confers a formidable economic moat Diverse range of brands and cuisine cater to differing consumer preferences Synergies between Jumbo s expansion plans and s position globally as a leading travel destination Source: No Signboard Seafood Figure 15: Jumbo s expansion plans in the PRC Weaknesses Dependence on external suppliers and susceptibility to supply chain disruptions Reliance on labour which is facing a supply crunch in Opportunities Leveraging on brand equity to tap on large overseas market through high-margin franchises Threats Foreign F&B entrants with novel dining concepts into the local F&B scene to vie for the same consumer dollar Economic slowdown, especially in, could see consumers tighten their purse strings and reduce spending at premium F&B destinations Investment Thesis Source: Company Presentation June 2018 Figure 16. Substantial revenue contribution from PRC outlets by Chinese market to set trajectory for growth Steady growth momentum in - Jumbo s current pace of opening at least one Jumbo Seafood outlet per year in the PRC looks set to continue in the foreseeable future. Aggressive expansion plans are focused on, with a total of 6 outlets in the major cities of Shanghai (4), Beijing (1) and Xi an (1) at present. New Jumbo Seafood outlets in other Chinese cities - Revenue contribution from the PRC jumped to 26% in FY17 from just 8.5% two years prior; We forecast revenue from Chinese outlets to contribute 32% of total revenue by FY20, with 3 new PRC outlets opened within this time. Geographical Region FY16A FY17A FY18E FY19E FY20E 85% 82% 76% 72% 71% 15% 18% 24% 28% 29% Source: Company, NUS Investment Society Estimates Management has identified possible new outlets in Shanghai and Beijing that could be operational within 2 years. Large middle and upper-class population in Chinese cities continue to be attractive for expansion. Tier-1 cities of Guangzhou and Shenzhen are still untapped, with potential JVs or franchises in Tier-2 cities, such as Tianjin, Chongqing and Xiamen, in the pipeline. Chinese market offers growth potential - According to IBISWorld, revenue for full service restaurants in hit US$441 billion in 2017 and grew at a CAGR of 10.6% from Having established a reputable brand name in due to its high exposure 4

6 Figure 17. Self-managed outlet growth to be driven primarily by new PRC outlets to Chinese tourists in and its now five-year presence in major Chinese cities, coupled with the burgeoning middle-class Chinese urban population continuing to grow over the long term, Jumbo s timely expansion is well-positioned to capture the increase in Chinese consumer F&B spending and its shift toward increasingly seeking out high-quality international flavours. 2. Franchise plans yet to be fully priced in Source: Company, NUS Investment Society Estimates Figure 18. Management s guidance on countries and territories with potential for franchising Jumbo is further pursuing its regional expansion for its Jumbo Seafood brand through franchise agreements with reputable companies possessing operating expertise in target countries. Its recent foray into Taiwan is through a JV and franchise agreement with Baipin Co. Ltd, the company which brought renowned regional brands like Tim Ho Wan into Taiwan. Attractive business model through franchising - Jumbo will earn a one-off franchising fee followed by recurring royalties, which is a percentage of the franchisee s revenue. We believe the franchise model will yield attractive returns for Jumbo as it taps on the expertise of local business partners, and through strategic selection of countries that will be receptive to an cuisine. Strong branding a cornerstone for success overseas - Leveraging on Jumbo s strong branding, the low capital requirements and scalability of such a business model also allows for quicker overseas expansion with greatly reduced capital risks, while providing greater recurring income visibility through contractual agreements with reputable companies with relevant industry expertise. Source: Company Presentation June 2018 Figure 19. Expected rapid expansion through the franchise model Source: Company, NUS Investment Society Estimates Figure 20. Jumbo Seafood s recent accolades Visible expansion plans with potential for upside surprise - Management has unveiled plans for 2-4 franchised outlets in 7 potential countries and territories, 3 of such (Vietnam, Taiwan and Thailand) franchise agreements with local business partners have already been inked in the last 2 years. Current franchise agreements in Vietnam and Taiwan have envisaged the opening of 8-10 outlets within the next 10 years, which translates into approximately 1 new outlet per year per country. We expect an average of 5 franchised outlets to be opened each year for the next 5 years, with 1 new franchise contract inked every year on aggregate, continuing the current expansion momentum. While there is strong visibility in the Group s expansion plans, we contend that the market is underappreciating the pace of its rapid expansion through franchising and its potential to lift the bottom line due to recent bottom line pressure due to higher start-up costs incurred for new PRC outlets. The low-risk and high potential-return franchise model allows Jumbo to reap a high return on investment with minimal resource commitments. We opine that this opens the door to upside surprises. This potential shot in the arm to both profit margins and bottom line growth has not been priced in by the market. 3. Local and regional expansion underpinned by wide economic moat Impeccable industry recognition confers strong brand equity - While its menu is not solely restricted to seafood, Jumbo Seafood s brand name is most strongly associated with Chilli Crab, an iconic an national dish, which is reinforced by strong emphasis on food and service quality, alongside its branding and marketing strategies. Source: Company Testament to its strong branding and impeccable service, Jumbo Seafood has received many accolades, favourable reviews and awards from the likes of gourmet lifestyle magazines and food review sites, 5

7 Figure 21. Jumbo Seafood local outlet count and revenue growth projections such as the TripAdvisor Certificate of Excellence in 2017 and obtaining the position of Finalist for AsiaOne People s Choice Awards We contend that many of its competitors lack the robust brand image enjoyed by Jumbo, thus conferring it the competitive advantage that sets it head and shoulders above the competition as it furthers its regional expansion. Highly-acclaimed amongst tourists and locals alike - A check with TripAdvisor reveals that Jumbo Seafood s Riverside outlet received a 4/5 rating, with 72% of reviewers giving at least a Very Good rating. As this is one of the local outlets that tourists are more likely to visit, we contend that it reflects the positive impressions left on them. Source: Company, NUS Investment Society Estimates Figure 22. Jumbo Seafood s high approval rating on TripAdvisor is testament to its strong branding Source: TripAdvisor Figure 23. Jumbo Seafood s The Riverwalk outlet is rated 5/5 by Chinese tourists on Dianping, with an average spend per pax of RMB504 (SGD100) Source: Dianping Figure 24. Photo of Ng Ah Sio Bak Kut Teh s Rangoon Road outlet published on a Taiwanese food and travel review blog Jumbo also has a loyal following of over 48,000 customers under the Jumbo Rewards customer loyalty programme, which seeks to encourage repeat patronage and attract new customers. These factors demonstrate Jumbo s ability to leverage on its economic moat to generate a loyal customer following from around the world, supporting its regional expansion efforts. Riding on its strong foothold in seafood locally and increasing brand recognition from tourists, we foresee the Group establishing 2 new Jumbo Seafood restaurants locally over the next 5 years, one of which could be located at the soon-to-be-completed Jewel Changi Airport, which allows grants Jumbo an exposure to the 60+ million passengers that Changi Airport handles yearly. Leveraging on branding for regional expansion As a regional tourism and corporate travel hub, is frequented by tourists throughout Asia. The success of Jumbo Seafood in thus far can be attributed to its high visibility and exposure to Chinese tourists in. This is reinforced by impeccable food and service quality that has left a formidable impression on Chinese tourists, as evidenced by the very high rating (5 out of 5 stars) the nearly all outlets received on Dianping.com, s largest website for location-based food and entertainment services. Chinese tourists are also willing to spend more when they dine at Jumbo Seafood as compared to locals ($91 average spend per pax across all local outlets for Chinese tourists vs $70 for locals). We believe that Jumbo will be able to replicate its success in establishing a formidable brand name in with a similar strategy for its franchised outlets. Tourist arrivals from countries that are part of Jumbo s expansion plans have shown robust growth, with those from target countries, Vietnam and Taiwan growing at a CAGR of 9.2%, 8.7% and 3.1% respectively from 2013 to We believe this trend will greatly aid Jumbo s regional expansion plans as more travellers will gain exposure to the Jumbo brand name, encouraging patronage at Jumbo Seafood outlets when they return home. 4. Harnessing the untapped potential of Ng Ah Sio Bak Kut Teh Potential in renowned and highly-acclaimed pork ribs As the Group s second-largest brand by outlet count, Ng Ah Sio Bak Kut Teh boasts a litany of famous celebrities and politicians as patrons, including Taiwan s former President Ma Ying Jeou. We believe that management is likely to capitalise on untapped brand potential stemming from Ng Ah Sio s high-profile exposure on the international stage. Source: flower32077 Pixnet While current franchise plans solely pertain to Jumbo Seafood, management is likely also exploring opportunities to franchise its Ng Ah Sio Bak Kut Teh outlets in Taiwan given Ng Ah Sio s appearances 6

8 Figure 25. Ng Ah Sio Bak Kut Teh local outlet count and revenue growth projections on numerous Taiwanese food blogs, with generally positive reviews thus far. Chinese cities could also be considered given the number of reviews for the brand on Dianping.com. However, given the lack of information provided by management regarding plans for Ng Ah Sio, we have left its potential franchising out of our financial projections. Nonetheless, we believe that a new local outlet could be operational within 2 years and we are projecting higher sales for the Ng Ah Sio brand as the Group seeks to further develop its potential and nurture brand equity over the foreseeable future. Source: Company, NUS Investment Society Estimates Figure 26. Jumbo Group s top 5 shareholders Shareholder Stake (%) JBO Holdings Pte Ltd 45.5% Sim Chye Hock 10.0% Tan Gee Jian 6.6% Ang Hon Nam 3.4% See Boon Huat 1.7% Source: 4Traders Figure 27. Key Management Jumbo Group - Key Management Ang Kiam Meng - Group CEO and Executive Director Son of Group founder Ang Hon Nam. With the Group for more than 25 years since Responsible for the overall management, operations, strategic planning, and business development of the Group. Tan Yong Chuan, Jacqueline - Executive Director Spouse of CEO Ang Kiam Meng. Oversees the procurement and purchasing functions, merchandising and pricing strategies, as well as customer engagement. Ron Sim Chye Hock - Director Founded OSIM in 1979 and has been instrumental in building it into the global brand it is today. Also Vice Chairman and Non-Independent Non-Executive Director of SGX-listed Perennial Real Estate Holdings Limited. Source: Company Annual Reports 5. Solid balance sheet lays groundwork for growth, reaffirmed by large insider ownership Robust balance sheet with no debt obligations at present Cash constitutes ~60% of total assets, providing ample liquidity to tap on should its expansion plans in require, while also doubling as a safety net as the Group embarks on its ambitious regional expansion. With a historically negative cash conversion cycle, the business is eminently highly cash-generative. We expect this trend to persist, projecting strong operating and free cash flows for our forecast period to support Jumbo s ambitious growth efforts. Heavy insider ownership demonstrating alignment of interests with shareholders Mr Ang Hong Nam, the founder of Jumbo, has a 1.6% direct stake and owns 45.5% through a holding company, JBO Pte Ltd. His son, Mr Ang Kiam Meng owns 1.6% of Jumbo Group Limited. The junior Mr Ang is also the Group s CEO. Besides mitigating the principal-agent conflict, strong insider ownership is also a strong indication of management s beliefs in the company s growth potential. Catalysts Upside surprise in next quarter earnings from on contributions from franchised outlets Successful launch of franchise restaurants along with inking of new franchise agreements with regional partners could trigger upward re-rating Financial Analysis Figure 28. Jumbo Group s projected ROE, ROA and ROIC trend Source: Company, NUS Investment Society Estimates Overview: The financial condition chart above shows our expectations for Jumbo 5 years forward, which are reflective of our assumptions (refer to appendix for details). 7

9 Figure 29. Extended DuPont Analysis Ratio 2018E Tax Burden 0.83 Interest Burden 1.00 Operating Margin 0.14 Total Asset Turnover 1.68 Equity Multiplier 1.28 Return on Equity Source: NUS Investment Society Estimates Figure 30. Substantial EBITDA growth backed by steady EBITDA margins New PRC outlets and franchise income to drive EBITDA growth We expect income from new PRC outlets and franchised outlets in countries including Vietnam, Taiwan and Thailand to drive growth. Operating synergies realized through greater economies of scale in and the low capital requirement franchise model, coupled with management s efforts to improve operating efficiency through automation efforts, would result in wider EBITDA margins going forward. Highly cash-generative business model to continue delivering strong free cash flow We expect the Group s cash conversion cycle remain negative, meaning that the firm is getting paid by customers long before they pay their suppliers. This translates into excellent cash flow generation ability and we are forecasting steady free cash flow generation into he foreseeable future. Earnings growth to actuate dividend increases We are forecasting dividends per share of 1.9 cents/share and 2.4 cents/share for FY18 and FY19 respectively (FY17: 1.7 cents), translating into a dividend yield of 3.6%, assuming a payout ratio of 65% for FY18. Source: Company, NUS Investment Society Estimates Figure 31. Projected EBITDA, Net Profit and FCFF Profitability The Group has managed to hold steady its expenses margins since going public. We have assumed such margins to be maintained in our financial projections. We have also projected stronger ROE and ROA, reflecting the shift toward the low capital intensity franchise model that would generated better returns for the Group. Leverage Owing to its strong cashflow generation and ample cash on hand, we do not foresee the Group taking on any long-term debt. This also frees Jumbo from any interest burden. Source: Company, NUS Investment Society Estimates Figure 32. Earnings growth to provide impetus for increasing dividends Source: Company, NUS Investment Society Estimates 8

10 Valuations 12M Price Target: S$0.64 Figure 33. WACC build-up WACC Assumptions Cost of Equity 8.3% Risk-free rate 2.44% Beta Equity risk premium 8.0% Cost of Debt 0.0% Pre-tax cost of debt 0% Tax rate 17% Market cap (S$ '000) 339,986 Total debt (S$ '000) - WACC 8.3% Source: Bloomberg, NUS Investment Society Estimates DCF Model A discounted cash flow analysis was used to estimate the intrinsic value of Jumbo s share price, given its track record of strong free cash flow generation and the recurring nature of revenue. The primary model is forecasted over 5 years, taking into account the Group s expansion plans both locally and overseas. The model is driven by revenue projections based on industry projections and research. On the cost front, working capital, COGS, SG&A and Capex serve as good parameters for projections, given the historical consistency of their margins. Three cases were formulated, with the base case derived from historical performance, management guidance and our industry outlook. The DCF model used to derive our target price is based on our base case projections, from which a target price of S$0.64 was derived. Figure 34. Blended equity risk premium Equity Risk Premium Country Risk Premium FY18E Rev WA RP 7.0% 122, % 11.0% 38, % Equity Risk Premium 8.0% Source: NUS Investment Society Estimates Revenue Projections A bottom-up approach was taken to estimate Jumbo Group s revenue taking into account its expansion plans, with key drivers being (1) average spend per pax for each brand, (2) yoy growth in average patron expenditure, (3) average daily table turns per brand and (4) growth in number of outlets per brand. Weighted Average Cost of Capital (WACC) Since the Group is currently debt-free, unlevered beta was calculated by linear regression of Jumbo Group s stock price against the Nikko AM Straits Times Index ETF for the last 500 trading days. Equity risk premium was calculated using a blended approach, taking into account Jumbo s revenue streams from both and. CAPM was then used to estimate the Cost of Equity, using the present 10-year bond yield as the risk-free rate. Cost of debt was taken to be zero since the Group had no debt at present. 9

11 Figure 35. Discounted cash flow valuation Gordon Growth Method Total PV of FCFF 64,919 Long term growth rate 2.0% Final year FCF 25,259 Terminal value 406,944 PV of terminal value 292,573 Enterprise value 357,493 Less: Debt - Add: Cash 51,262 Less: Minority interest - Add: Investment in assoc./jv 550 Implied equity value 409,305 Diluted NOSH 641,483 Implied stock price $ 0.64 Exit Multiple Method Total PV of FCFF 64,919 Terminal year EBITDA 46,982 Exit EV/EBITDA 9.0 x Terminal value 422,840 PV of terminal value 304,002 Enterprise value 368,921 Less: Debt - Add: Cash 51,262 Less: Minority interest - Add: Investment in assoc./jv 550 Implied equity value 420,733 Diluted NOSH 641,483 Implied stock price $ 0.66 Source: NUS Investment Society Estimates Figure 36. Jumbo vs Peers Forward P/E and ROE Terminal Growth The terminal growth rate was taken to be a 2%, reflecting the expected long-term growth of GDP per capita in the countries Jumbo operates in, which we believe consumer incomes and expenditure is directly tied to. While s long-term GDP per capita growth is higher than 2%, our input accounts for an increasingly competitive F&B landscape in Asia which we believe will slow growth in the long run. According to our sensitivity analysis, a 0.5% reduction in terminal growth rate would reduce our TP by S$0.03, while the converse would raise the TP by $0.04. Alternative Valuation Methods Supplementing our primary terminal growth-based DCF valuation, we used the exit multiple-based DCF valuation, while achieved an intrinsic value of $0.66, slightly above our terminal growth-based DCF valuation TP of $0.64. On a relative valuation (RV) basis, Jumbo Group is currently trading at a forward P/E of 18.6x according to our projections, against a regional peer average of 20.5x and median of 19.0x. We believe that a +1FY P/E of 22.5x, representing a slight premium above regional peer average, is justified given the Jumbo Group s stronger branding and comparatively brighter growth prospects, coupled with an excellent track record of executing its growth plans. From our analysis, we believe that our TP of S$0.64 is representative of Jumbo Group s intrinsic value, a 20.8% premium from its current trading price. We remain confident that this valuation affirms our Buy recommendation on the stock and it validates our view of the upcoming 12-month period. Figure 38. DCF Sensitivity Analysis Source: Bloomberg, NUS Investment Society Estimates Figure 37. Forward PE sensitivity analysis Forward P/E Multiple Target Price 32 $ $ $ $ $ $ $ $ $ $ $0.37 Source: NUS Investment Society Estimates Source: NUS Investment Society Estimates Investment Risks Supply Risk (1) Jumbo depends on external suppliers for its raw ingredient needs, mainly mud crabs, and supply is subject to seasonal and climate conditions. Fluctuations in prices and supply of raw ingredients due to unfavourable climate and rising demand can put pressure on raw ingredient costs and crimp margins. Jumbo has minimized this risk by sourcing for their crabs from up to 20 suppliers located in 5 countries, minimising the impact of potential supply disruptions. Impact: High Probability: Low 10

12 Figure 39: Risk matrix Strategic Risk (2) Jumbo s overseas expansion plans hinges on its brand image, which is closely associated with s national image A political incident involving that creates negative sentiment toward the Republic could derail Jumbo s overseas expansion should any form of a boycott be instigated against an entities overseas However, Jumbo s expansion through franchising across several different countries partially mitigates this risk Impact: Medium Probability: Low Operational Risk (3) Food Safety Risk Source: NUS Investment Society Estimates Figure 40: WSQ Training modules for Jumbo Staff Food hygiene is a primary concern in the F&B industry; Lapses in food safety could easily tarnish Jumbo s reputation, and in extreme cases, result in the revocation of its operating licenses Jumbo has minimized such risks through mandating all staff to undergo an intensive Workforce Skills Qualification (WSQ) course on food preparation, hygiene and safety to train them in adopting the right food handling techniques to ensure optimal food safety. Impact: High Probability: Low Operational Risk (4) Manpower Risk Source: Company Figure 41: Fast Track Programme for Jumbo Staff Source: Company F&B industry jobs remain shunned by locals due to the perceived long hours for low pay and lack of prestige, while foreign labour remains heavily regulated, resulting in lower supply of manpower This may hinder Jumbo Group s operations and expansion efforts in, while putting pressure on margins Jumbo s mitigating strategy has revolved around prioritising employee skills upgrading and welfare to attract workers and inculcate employee loyalty to reduce turnover Impact: Medium Probability: Medium Currency Risk (5) Jumbo is increasingly exposed to RMB fluctuations given that its Chinese outlets increasingly account for its revenue. A depreciation in the RMB would impact earnings, which are reported in SGD However, management has mentioned that it relies on natural hedges to mitigate FX risks, which would help alleviate the impact of a RMB depreciation Impact: Low Probability: Medium 11

13 Disclaimer This research material has been prepared by NUS Invest. NUS Invest specifically prohibits the redistribution of this material in whole or in part without the written permission of NUS Invest. The research officer(s) primarily responsible for the content of this research material, in whole or in part, certifies that their views are accurately expressed and they will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this research material. Whilst we have taken all reasonable care to ensure that the information contained in this publication is not untrue or misleading at the time of publication, we cannot guarantee its accuracy or completeness, and you should not act on it without first independently verifying its contents. Any opinion or estimate contained in this report is subject to change without notice. We have not given any consideration to and we have not made any investigation of the investment objectives, financial situation or particular needs of the recipient or any class of persons, and accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the recipient or any class of persons acting on such information or opinion or estimate. You may wish to seek advice from a financial adviser regarding the suitability of the securities mentioned herein, taking into consideration your investment objectives, financial situation or particular needs, before making a commitment to invest in the securities. This report is published solely for information purposes, it does not constitute an advertisement and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein. The research material should not be regarded by recipients as a substitute for the exercise of their own judgement. Any opinions expressed in this research material are subject to change without notice NUS Investment Society Appendix A: Jumbo Group - Outlet Information - Appendix - Brand Arrangements Opening Year Years in Op GFA (sq ft) Est Table Count Est Avg Seating/Table Est Seating Capacity Est Avg Spend per Pax Jumbo Seafood Jumbo Seafood East Coast Fully Owned & Managed , Jumbo Seafood, Riverside Point Fully Owned & Managed , Jumbo Seafood, The Riverwalk Fully Owned & Managed , $70.00 Jumbo NSRCC Fully Owned & Managed , Jumbo Dempsey Fully Owned & Managed , Jumbo Seafood iapm, Shanghai Jumbo (70%) & Breadtalk (30%) , Jumbo Seafood Raffles City, Shanghai Jumbo (70%) & Breadtalk (30%) , Jumbo Seafood IFC Mall, Shanghai Jumbo (70%) & Breadtalk (30%) , $77.23 Jumbo Seafood SKP, Beijing Jumbo (51%) & BHG (49%) , Jumbo Seafood L'Avenue Mall, Shanghai Jumbo (70%) & Breadtalk (30%) , Jumbo Seafood Xi'An SKP, Xi'An Jumbo (51%) & BHG (49%) , Taiwan Jumbo Seafood Shin Kong Misukoshi, Taipei Franchise NA $70.00 Vietnam Jumbo Seafood ĐỒNG KHỞI, Ho Chi Minh Franchise NA $70.00 Ng Ah Sio Bak Kut Teh Ng Ah Sio Bak Kut Teh, Rangoon Road Fully Owned & Managed , Ng Ah Sio Bak Kut Teh, Marina Bay Sands Fully Owned & Managed Foodcourt Store $25.00 Ng Ah Sio Bak Kut Teh, Chui Huay Lim Club Fully Owned & Managed , Ng Ah Sio Bak Kut Teh, Resorts World Sentosa Fully Owned & Managed , JPOT JPOT, Vivocity Fully Owned & Managed , JPOT, Tampines 1 Fully Owned & Managed , $35.00 Chui Huay Lim Teochew Cuisine Chui Huay Lim Club, Newton Fully Owned & Managed , $55.00 J Café J NSRCC Fully Owned & Managed , $16.00 Tsui Wah HK Café Tsui Wah HK Café, River Valley Jumbo (49%) & Kang Wang (51%) , $25.00 Data Sources: Company Presentations, CGS-CIMB, Maybank Kim Eng, Dianping, NUS Investment Society Estimates 12

14 Appendix B: Relative Valuation Local and Regional Peer Comparisons Company Bloomberg Ticker Notable Brands Share Price (local ccry) Market Cap (US$'000) +1FY P/E +1FY P/B +1FY P/S +1FY EV/EBITDA +1FY EV/Sales Last FY Net Profit Margin (%) Last FY ROE (%) Last FY ROA (%) Last FY Net Debt/Equity (x) Jumbo Group Ltd JUMBO SP Jumbo Seafood, Ng Ah Sio Bak Kut Teh, JPOT , % 22.0% 18.1% 0.00x -listed F&B ABR Holdings Ltd ABR SP Swensen's, Seasons Confectionary & Bakery ,475 N/A N/A N/A N/A N/A 5.3% 6.1% 4.8% 0.00x BreadTalk Group Ltd BREAD SP BreadTalk, Din Tai Fung, Food Republic, Toast Box , % 13.6% 3.9% 1.14x Japan Foods Hldg Ltd JFOOD SP Ajisen, Akimitsu, Kazokutei , % 17.0% 13.3% 0.00x Katrina Group Ltd KTG SP Bali Thai, so Pho ,148 N/A N/A N/A N/A N/A 1.7% 7.1% 4.4% 0.00x Kimly Ltd KIMLY SP Kimly Coffeeshop, FoodClique, Kimly Seafood , % 29.1% 20.2% 0.00x Neo Group NGL SP Neo Garden, Kim Paradise, Umisushi , N/A 0.4 N/A % 8.6% 2.3% 1.96x No Signboard Hldgs Ltd NSB SP No Signboard Seafood, Draft Denmark ,790 N/A N/A N/A N/A N/A 31.7% 46.3% 30.4% 0.06x Old Chang Kee Ltd OCK SP Old Chang Kee , % 14.2% 7.7% 0.40x RE&S Hldgs Ltd RES SP Ichiban Sushi, Shokutsu Ten ,296 N/A N/A N/A N/A N/A 4.0% 23.1% 9.7% 0.70x Sakae Hldgs Ltd SAKAE SP Sakae Sushi ,800 N/A N/A N/A N/A N/A 1.5% 2.9% 0.9% 1.57x Soup Restaurant Group SOUP SP Soup Restaurant, Café O ,183 N/A N/A N/A N/A N/A 4.8% 18.9% 12.6% 0.00x Tung Lok Restaurants TUNG SP TungLok Signatures, Dancing Crab, Lao Beijing ,496 N/A N/A N/A N/A N/A -1.6% -10.1% -4.3% 0.19x Local Peers - Simple Average 113, % 14.7% 8.8% 0.50x Regional-listed F&B Ajisen () 538 HK Ajisen , % -16.4% -13.2% 0.11x Berjaya Food Berhad BFD MK Jollibean Foods, Berjaya Roasters (Kenny Rogers) , % 0.3% 0.1% 0.72x Café de Coral 341 HK Café De Coral, Shanghai Lao Lao , % 13.3% 10.3% 0.00x Gourmet Master 2723 TT 85 Café , % 21.7% 13.6% 0.12x Jolibee Foods Corp JFC PM Jolibee , % 17.1% 8.1% 0.38x La Kaffa Intl 2732 TT La Kaffa, Chatime, Bake Code , N/A 0.8 N/A % 13.8% 7.9% 0.39x Minor Intl MINT TB Burger King (Thailand, Maldives, Myanmar) , % 10.7% 4.5% 1.00x MK Retaurant Group M TB MK Restaurants , % 17.4% 14.8% 0.00x Oishi Group OISHI TB Oishi Grand, Oishi Eaterium, Oishi Japanese Buffet , % 25.7% 14.8% 0.36x Tsui Wah Hldgs 1314 HK Tsui Wah Restaurants , % 6.9% 5.3% 0.06x Yum Hldgs YUMC US KFC, Pizza Hut, Taco Bell ,577, % 14.5% 9.8% 0.01x Regional Peers - Simple Average 1,861, % 11.4% 6.9% 0.29x Overall Average 949, % 13.1% 7.9% 0.40x Data Sources: Bloomberg, NUS Investment Society Estimates Appendix C: Extended DuPont Analysis Extended DuPont Analysis 2015A 2016A 2017A 2018E 2019E 2020E 2021E 2022E Tax Burden Profit Before Tax 15,141 18,438 17,819 22,028 26,120 35,533 38,799 40,540 Net Income 13,322 15,708 15,040 18,283 21,679 29,492 32,204 33,648 Tax Burden Ratio Interest Burden Profit Before Tax 15,141 18,438 17,819 22,028 26,120 35,533 38,799 40,540 EBIT 15,173 18,464 17,823 22,028 26,120 35,533 39,028 40,907 Interest Burden Ratio Profitability Revenue 122, , , , , , , ,878 EBIT 15,173 18,464 17,823 22,028 26,120 35,533 39,028 40,907 Operating Profit Margin Asset Turnovers Revenue 122, , , , , , , ,878 Total Assets 83,517 86,238 83,230 95, , , , ,937 Total Asset Turnover Financial Leverage Total Assets 83,517 86,238 83,230 95, , , , ,937 Total Equity 65,197 66,508 68,480 74,879 81,383 88,756 96, ,219 Asset/Equity Ratio Return on Equity 20.4% 23.6% 22.0% 24.4% 26.6% 33.2% 33.3% 32.0% 13

15 - Financial Model - Scenario Assumptions Jumbo Group Limited Assumptions x Assumptions Notes 2017A 2018E 2019E 2020E 2021E 2022E All figures in SGD '000, unless stated otherwise Comments Base Case Assumptions - Revenue X New Outlets (Company-Operated) Jumbo Seafood Downside Case Base Case Jewel Changi Airport new outlet Upside Case Jewel Changi + 1 other new outlet Ng Ah Sio Bak Kut Teh Downside Case Base Case Historical trend Upside Case JPOT Downside Case Base Case Estimation Upside Case Chui Huay Lim Teochew Cuisine Downside Case Base Case Management guidance Upside Case J'café Downside Case Base Case Estimation Upside Case Jumbo Seafood Downside Case Expansion momentum stalls Base Case Historical trend of ~1 per yr Upside Case Aggressive expansion X Est Average Table Count per Outlet Jumbo Seafood Held constant Ng Ah Sio Bak Kut Teh Held constant JPOT Held constant Chui Huay Lim Teochew Cuisine Held constant J'café Held constant Jumbo Seafood Held constant X Est Seat Capacity per Table Jumbo Seafood Held constant Ng Ah Sio Bak Kut Teh Held constant JPOT Held constant Chui Huay Lim Teochew Cuisine Held constant J'café Held constant Jumbo Seafood Held constant X Average Spend per Pax (SGD) Jumbo Seafood $60.00 HungryGoWhere avg spend Ng Ah Sio Bak Kut Teh $14.00 HungryGoWhere avg spend JPOT $35.00 HungryGoWhere avg spend Chui Huay Lim Teochew Cuisine $55.00 HungryGoWhere avg spend J'café $16.00 Estimation Jumbo Seafood $77.23 Dianping.com avgspend 14

16 X Average Spend per Pax - Yoy Growth (%) Jumbo Seafood Downside Case 0% 0% 0% 0% 0% Base Case 2% 2% 2% 2% 2% Long term GDP/capita growth Upside Case 3% 3% 3% 3% 3% Ng Ah Sio Bak Kut Teh Downside Case 0% 0% 0% 0% 0% Base Case 2% 2% 2% 2% 2% Long term GDP/capita growth Upside Case 3% 3% 3% 3% 3% JPOT Downside Case 0% 0% 0% 0% 0% Base Case 2% 2% 2% 2% 2% Long term GDP/capita growth Upside Case 3% 3% 3% 3% 3% Chui Huay Lim Teochew Cuisine Downside Case 0% 0% 0% 0% 0% Base Case 2% 2% 2% 2% 2% Long term GDP/capita growth Upside Case 3% 3% 3% 3% 3% J'café Downside Case 0% 0% 0% 0% 0% Base Case 2% 2% 2% 2% 2% Long term GDP/capita growth Upside Case 3% 3% 3% 3% 3% Jumbo Seafood Downside Case 1% 1% 1% 1% 1% Base Case 3% 3% 3% 3% 3% Long term GDP/capita growth Upside Case 5% 5% 5% 5% 5% X Est Avg Daily Table Turns (x) Jumbo Seafood Downside Case 1.45x 1.45x 1.45x 1.45x 1.45x Base Case 1.57x 1.57x 1.57x 1.57x 1.57x 1.57x Status quo Upside Case 1.65x 1.65x 1.65x 1.65x 1.65x Ng Ah Sio Bak Kut Teh Downside Case 5.50x 4.00x 4.00x 4.00x 4.00x Base Case 6.21x 6.20x 6.20x 6.20x 6.20x 6.20x Status quo Upside Case 6.50x 6.50x 6.50x 6.50x 6.50x JPOT Downside Case 2.20x 2.20x 2.20x 2.20x 2.20x Base Case 2.48x 2.48x 2.48x 2.48x 2.48x 2.48x Status quo Upside Case 2.70x 2.70x 2.70x 2.70x 2.70x Chui Huay Lim Teochew Cuisine Downside Case 0.80x 0.80x 0.80x 0.80x 0.80x Base Case 0.90x 0.90x 0.90x 0.90x 0.90x 0.90x Status quo Upside Case 1.00x 1.00x 1.00x 1.00x 1.00x J'café Downside Case 1.10x 1.10x 1.10x 1.10x 1.10x Base Case 1.24x 1.24x 1.24x 1.24x 1.24x 1.24x Status quo Upside Case 1.30x 1.30x 1.30x 1.30x 1.30x Jumbo Seafood Downside Case 0.48x 0.44x 0.40x 0.40x 0.40x Base Case 0.50x 0.50x 0.53x 0.55x 0.60x 0.60x Status quo Upside Case 0.55x 0.58x 0.60x 0.65x 0.65x 15

17 x Notes 2017A 2018E 2019E 2020E 2021E 2022E All figures in SGD '000, unless stated otherwise Comments Assumptions - Franchise Base Case X New Franchised Outlets Taiwan Downside Case Expansion momentum stalls Base Case Franchise agreement Upside Case Expansion picks up pace Vietnam Downside Case Expansion momentum stalls Base Case Franchise agreement Upside Case Expansion picks up pace Thailand Downside Case Expansion momentum stalls Base Case Estimation Upside Case Expansion picks up pace Pipeline (Other Countries) Downside Case Expansion momentum stalls Base Case Estimation Upside Case Expansion picks up pace Pipeline - New Franchise Agreements (Other Countries) Downside Case Expansion momentum stalls Base Case Estimation Upside Case Expansion picks up pace X Revenue Assumptions - Franchised Outlets Average spend per pax (SGD) $60.00 Based on SG avg spend Yoy Growth (%) Downside Case 1.0% 1.0% 1.0% 1.0% Base Case 2.0% 2.0% 2.0% 2.0% Long term GDP/capita growth Upside Case 3.0% 3.0% 3.0% 3.0% Est average table count per outlet Estimation Est seat capacity per table Estimation Daily table turns (x) Downside Case 0.25x 0.25x 0.25x 0.25x 0.25x Base Case 0.30x 0.30x 0.30x 0.30x 0.30x Estimation Upside Case 0.35x 0.35x 0.35x 0.35x 0.35x X Franchise Assumptions Share of revenue (%) 5.0% 5.0% 5.0% 5.0% 5.0% Estimation Initial Franchise Fee (SGD '000) Based on FY17 16