Jumbo Group Limited

Jumbo Group Limited ("Jumbo" or the "Company") is offering 88.23m new shares at 25 cents each where there is only a meagre 2m shares available to the public! The rest of 86.23m shares will be distributed through placement. The IPO will close on 5 Nov 2015 at 12pm and starts trading on 9 Nov.

Separate from the offering, it has signed up Cornerstone Investors to subscribe for 72.1m cornerstone shares who will together, own 11.2% of the enlarged company. The market cap post IPO will be around ~S$160.3m.

Writing this IPO post just before dinner was not a wise decision as i became quite hungry thereafter, especially just coming back from an overseas trip without local food.

Business

I don't think Jumbo needs much introduction as it is a well-known name locally. It was first established in 1987 and currently operates 14 F&B outlets in Singapore with 2 in Shanghai, China and a 3rd one opening in Jan 2016.

While Chili Crab is probably its most famous seafood dishes, it now owns a portfolio of restaurants such as JPOT, Ng Ah Sio Bah Kut Teh and Chui Huay Lim Teochew Cuisine.

Financial Highlights

Revenue has been increasing over the last 3 years with profit rising to $13.7m in FY2014. The revenue continue to grow healthily to $62m in 1H 2015 but profit grew to $6.871m (pro-forma). 

Assuming the service agreement has been in place and based on the enlarged share capital, the Company is listing at a PER of around 12.4x using the pro forma EPS for FY2014.

Assuming net profit either doubled from first half or increased by 9% (using the first half growth rate) from FY2014, the full year profit will likely be between $13.7m to $14.98m. This translates into a forward EPS range of between Singapore 2.13 to 2.33 cents and a forward PER of between 10.7x to 11.7x

Business Strategies and Future Plans

The Company intends to use the net proceeds raised to:

• Open at least 4 outlets in PRC and Singapore within the next 24 months
• Have more central kitchens
• Expand business through M&A, JV and strategic alliances

Shareholders

This is the shareholders list post IPO. The family continues to own 57.9% of Jumbo. There are two significant shareholders that emerge. One was Heliconia Capital and the other was Ron Sim (Osim's founder). They were also the cornerstone investors. Heliconia is wholly owned by Temasek and provides growth capital to Singapore SMEs while Ron Sim is one of the richest man in Singapore.

Dividend Policy

Jumbo intends to pay no less than 30% of its net profit attributable to Shareholders in FY2016 and FY2017. Based on projected EPS of around say, 2.13 cents, the dividend yield is around, 2.5%.

What I like about the Company

• Well known and established brand in Singapore
• JBO has undertaken 24 months moratorium (from the usual 12 months) and Cornerstone investors for 6 months
• Profitable, highly cash generative and dividend-paying business
• Reputable cornerstone investors in Heliconia and Ron Sim 
• Expanding in China seemed to provide a new engine of growth 

Some of my concerns

• Growth for Jumbo in Singapore likely to be limited. Personally, i had not ate at Jumbo restaurants for the last 12 months
• Family members continue to play key roles in the Company
• Payment of $51.7m conditional interim dividend. While it is meant for "restructuring", the prospectus wasn't very clear whether it is used to acquire the businesses or to pay out cash to the existing shareholders.
• Personally I don't like this business where rental and labor costs are rising rapidly coupled with slowing economic and tourism growth in Singapore
• Economic slowdown in China when consumption at restaurants are on the decline

Peer Valuations

The listed peers are trading at very rich and ridiculous valuation. Some of them are not very profitable.

Assuming a 15x PER, the fair value range is between 32 to 35 cents, representing >20% upside from its IPO price.

My Ratings

Personally I don't like this sector but i understand from people in the know that Jumbo's IPO is very chilli crab hot and that the Cornerstone Investors had their allocation cut as well. My allocation wasn't spared as well and I was cut by 20% :-P

Heliconia and Ron are probably long term investors and that had somewhat help "validate" the long term growth plans. As such, i believe there will be a nice pop on the first day.

I will give it a 3 Chilli ratings for this IPO but 2 Chilli over the longer term and I won't overstay my welcome.