Jumbo Group - UOB Kay Hian 2017-05-16: 2QFY17 Singapore Sales Slow Down But Shanghai Operations Still Growing

Jumbo Group (JUMBO SP) - UOB Kay Hian 2017-05-16: 2QFY17: Singapore Sales Slow Down But Shanghai Operations Still Growing JUMBO GROUP LIMITED 42R.SI

Jumbo Group (JUMBO SP) - 2QFY17: Singapore Sales Slow Down But Shanghai Operations Still Growing

  • Jumbo reported weaker-than-expected 2QFY17 results. 
  • Competition has intensified in Singapore especially in the hotpot and Bak Kut Teh segments. The group’s flagship East Coast seafood outlet is under pressure from the newly-redeveloped Marine Cove enclave as crowds are thinning. 
  • The group’s decision to expand into Shanghai is proving to be astute as business is doing well there. 
  • Maintain HOLD but with a slightly lower DCF-based target price of S$0.64. 
  • Entry price: S$0.58.



RESULTS


2QFY17 results below our expectations. 

  • For 2QFY17, jumbo recorded a net profit of S$5.8m (+0.3% yoy). Sales fell 0.6% yoy from S$39.6m in 2QFY16 to S$39.4m in 2QFY17. This was mainly attributable to weakness in the Jpot brand, Bak Kut Teh (BKT) segment and in the flagship East Coast seafood outlet. 
  • Looking at FY16, 2QFY16 net profit accounted for about 38% of full-year net profit while 1HFY16 accounted for about 51% of net profit for the year..

Gross margins trending up. 

  • Jumbo’s gross margin rose 3.5% yoy from 60.4% in 2QFY16 to 63.9% in 2QFY17. The increase was due to better margins from the Shanghai operations as operational efficiencies and economies of scale started to kick in. 
  • In addition, the outlets in Shanghai saw a better sales mix for the quarter. The Shanghai seafood outlets accounted for about 16.5% of total sales for 2QFY17 vs about 16% of total sales for 2QFY16. With more outlets, we could see potential for further gross margin expansion in Shanghai.

Surprise dividend declared. 

  • Jumbo declared an interim dividend of 0.5 S cents per share which came as a surprise to us.


STOCK IMPACT


Intense competition in the hotpot and BKT segments. 

  • With a number of hotpot brands in Singapore such as Hai Di Lao and Paradise Group’s Beauty In the Pot, JPot has come under pressure due to the sheer number of choices available to consumers.
  • JPot currently has three outlets at Vivocity, Parkway Parade and at Tampines 1. 
  • In Vivocity, Jpot competes with Shabuya, a Japanese hot-pot concept and arguably the most popular hotpot brand in Singapore Hai Di Lao. At Parkway Parade, our channel checks indicate that foot traffic has been sluggish at the mall. For the BKT segment, competition is even more intense with many small players in both malls and hawker centres. However, management has indicated that the BKT outlet at Resorts World Sentosa has exceeded expectations so far.

East Coast flagship outlet seeing slower sales. 

  • The reopening of Marine Cove in late-16 which is about 2km away from the East Coast Seafood Centre where Jumbo’s flagship seafood outlet is located has had an impact on foot traffic. The new Marine Cove houses a mega outdoor 21,500 sqm playground coupled with a host of F&B establishments such as McDonalds, Hill Street Coffee Shop and Babalicious. 
  • In our previous updates we also highlighted the possibility that higher-than-expected rainfall could affect Jumbo’s outdoor seafood restaurants. According to Data.gov.sg, in Jan and Feb 17 alone, there were a total of 36 rainy days as compared with 31 rainy days in 1Q16. This would likely have had a bigger impact on Jumbo’s outdoor restaurants such as East Coast, Clarke Quay and Dempsey.

Regional expansion going smoothly. 

  • Outside of Singapore, Jumbo’s expansion plans have been going smoothly with the opening of the first franchised Jumbo Seafood restaurant in Ho Chi Min City, Vietnam on 5 May 17. 
  • The group also plans to expand into Beijing through a JV with Beijing Hualian Group with the first restaurant slated to open by 3Q17. 
  • We expect at least one more regional franchising deal to be secured by the end of 2017 together with one more outlet in Shanghai.


EARNINGS REVISION/RISK

  • We lower our FY17-19 core net profit estimates by 4.0-4.8% on the back of lower table turnover for JPot and Singapore seafood outlets.
  • Key risks include a slowdown in sales in China outlets, a pandemic in Singapore and higher-than-expected rainfall.


VALUATION/RECOMMENDATION

  • Maintain HOLD with a lower DCF-based target price of S$0.64 (previously S$0.67).
  • Suggested entry price is S$0.58.


SHARE PRICE CATALYST

  • Higher-than-expected store openings.
  • Franchising deals with regional companies.




Nicholas Leow UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-05-16
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 0.640 Down 0.670



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