Nomura started Singapore chilli crab icon Jumbo Group at Buy with S$0.59 target price, saying it expected profit to rebound sharply in fiscal 2019 after a weak fiscal 2018.
“Jumbo is a direct play to the rising food tourism trend and it currently operates 12 outlets in Singapore and six outlets in China under five restaurant brands,” Nomura said in a note on Friday.
The investment bank pointed to three potential catalysts for fiscal 2019, which begins on 1 October: First, it said it expected at least three new store openings in Singapore during the fiscal year.
It estimated those new stores — two Jumbo Seafood outlets and one Chui Huay Lim Teochew Cuisine outlet — would contribute around S$20 million in revenue as they would be located in high-footfall areas, which could mean a higher ticket price per person due to the premium sites.
Nomura noted that it expected a Jumbo Seafood outlet would be at Ion Orchard Level 4, citing renovation hoarding signage; it also said it believed the Jewel Changi at Changi Airport could be a potential location due to its tourist appeal. It estimated annual turnover of around S$6 million to S$8 million per outlet, after factoring in some start-up drag.
The second catalyst would come from a tapering off or stabilizing of the increased start-up costs and operating expenses from hiring the China management team, larger staff base and one-time marketing expenses for the 30th anniversary in fiscal 2018, Nomura said.
Thirdly, Nomura said that the contributions from its larger franchise base and its joint ventures were set to become more significant from fiscal 2019 and afterward, with the investment bank forecasting those contributions would double in the upcoming fiscal year from a low base.
It noted the stock was trading at a fiscal 2019 price-to-earnings ratio of 23.5 times, below its mean, but largely in line with regional peers, despite having a higher return-on-equity.
“We believe Jumbo should trade at a premium given our expectations of a higher fiscal 2019 earnings per share profile within a developed market,” Nomura said.
It noted its forecast didn’t include any potential upside from a better-than-expected performance in China; Nomura currently expects the China operations to have a three-year revenue compound annual growth rate (CAGR) of 14 percent, compared with consensus forecasts for more than 30 percent.
“Our fiscal 2019 estimates are below consensus due to our less aggressive assumptions on the China business along with some store closures in Singapore,” Nomura said.
If the China business beats its forecasts, fiscal 2019 profit after tax and minority interests could rise by as much as 37 percent, Nomura said, noting that compared with its current forecast for 25 percent growth.