Number of franchise outlets to quintuple by end-FY18F

• JUMBO added three new JUMBO Seafood franchise outlets in Taipei, Taichung and Fuzhou in FY9/18F and plans to open one new franchise outlet in in Bangkok by end- 2018F. We estimate its franchise outlet count will rise to five by end-FY18F, including one Bak Kut Teh franchise outlet that was opened in Taipei in Jul 2018.
• JUMBO plans to add 5-6 franchise outlets each year and targets Shenzhen, other Chinese cities, Korea, Hong Kong, Macau and Indonesia for future expansion.

Renowned chilli crab restaurant chain in Singapore still growing

• JUMBO Seafood outlets in Singapore continue to capitalise on their signature chilli crab dish, evidenced by their strong average monthly sales of S$148-159 per sq ft in Oct 2014-Mar 2018, in comparison to the declining sales of the “No Signboard Seafood” restaurants, based on our estimates.
• Other F&B brands under the JUMBO group also showed improvement in sales per sq ft over the same period.

Two new JUMBO Seafood outlets in Singapore in the pipeline

• We project that JUMBO would add two new JUMBO Seafood outlets in Singapore – one JUMBO Premium Seafood outlet in ION Orchard shopping mall and another potentially in the upcoming Jewel Changi (due to open in 1HCY19F) – and one new Chui Huay Lim Teochew Cuisine outlet over the next 12 months.
• We project these three new restaurants could add S$35m-40m to group revenue by end-FY20F.

Cost optimisation efforts in 3QFY18 to boost margins in future

• JUMBO’s operating costs declined 16.5% q-o-q to c.S$85 per sq ft per month in 3QFY18, based on our estimates, after the sharp spike in 4QFY17-2QFY18 due to the opening of three new outlets in PRC then. 
• If JUMBO maintains/reduces its costs per sq ft amid the opening of new outlets in Singapore and franchise expansion, we believe this would translate into uplift in FY19-20F net margins.

Maintain ADD, with lower Target Price of S$0.58

• We raise operating cost assumptions, lowering FY18-20F EPS by 5.1-14.9%. We expect JUMBO’s EPS to trough in FY18F, before strong recovery in FY19F (+24% y-o-y). Its 12-month forward P/E is now 19.8x, more than 1 s.d. below historical 3-year mean of 26.7x.
• Retain ADD but lower Target Price to S$0.58, pegged to 21x FY20F P/E (c.10% discount to regional F&B peers’ 23x CY19F P/E).
• Risk is escalation in cost per sq ft from new outlets.