Jumbo Group - DBS Research 2017-08-10: Hit By Higher Costs

Jumbo Group - DBS Vickers 2017-08-10: Hit By Higher Costs JUMBO GROUP LIMITED 42R.SI

Jumbo Group - Hit By Higher Costs

  • Jumbo Group's 3Q17 results below, led by higher than expected costs.
  • Outlook dampened by higher opex.
  • Lower FY17-19F earnings by 6-15%.
  • Maintain HOLD, TP S$0.67.



Maintain HOLD with lower TP of S$0.67. 

  • We maintain our HOLD rating on Jumbo with lower TP of S$0.67. We believe growth is expected to be challenged by higher costs. 3Q17 earnings revealed signs of higher operating costs led by rents and depreciation, while revenue has not tracked our expectations. 
  • New stores are expected to contribute through JVs, partnerships, and franchises. But these are largely reflected in our growth projections. 
  • Jumbo currently trades at 20x FY18F, in line with regional peers. 
  • Maintain HOLD for now until valuations become more palatable.


WHAT’S NEW


3Q17 earnings below: 

  • 3Q17 core earnings were S$3.3m (- 2.6% y-o-y), below expectations. 
  • Revenue was slightly below our estimates at S$34.8m (+6.4% y-o-y), with growth driven by both Singapore and China stores. The disappointment came from higher than expected costs, which saw operating margins decline to 11.2% (-0.7 ppt).

Higher costs: 

  • There was a decline in gross margin (to 62.7%) both y-o-y and sequentially due to the increase in food costs.
  • Operating margins also declined to 11.2% led by higher depreciation and operating leases, which increased by 30% and 24% y-o-y respectively. These increases were mainly due to new outlets, outlet expansion and new corporate offices in Singapore and Shanghai.

Cut FY17-19F earnings by 6-18% on higher cost. 

  • 3Q17’s earnings disappointment was largely led by higher opex mainly due to increase in the take up of new properties.
  • Revenue nonetheless continued to grow on the back of more outlets. But even then, 3Q17 revenue also fell slightly short of our expectations. This quarter’s per outlet sales is currently tracking below our estimates. 
  • Based on the current sales and opex run-rate, we are lowering our FY17F earnings forecast by 6%, and FY18-19F earnings by 11% to 15%. Reduction in our earnings projection mainly reflects a higher cost environment.


Valuation


Maintain HOLD, lower TP to S$0.67. 

  • We maintain our HOLD rating on the stock as we see cost challenges dampening growth expectations. 

Pegged to peers’ average of 23x FY18F PE. 

  • Jumbo is trading in line with regional peers at 20x FY18F PE. We derive our TP of S$0.67 based on 23x FY18F PE, pegged to Jumbo’s historical average PE.


Where we differ. 

  • We see earnings growing at a slower pace than consensus. This is largely due our expectations of higher operating cost structure ahead, led by rents and depreciation.


Potential catalyst. 

  • Faster than expected outlet expansion especially in China and regional franchises as a potential stock catalyst provided cost structure does not deteriorate considerably. 
  • More franchise outlets will also deliver better margins and growth once the number of outlets attain critical mass.


Key Risks to Our View

  • Apart from operational risks, we see failure to deliver growth in China as a key risk to our earnings growth projection. Singapore’s business is stable while the bulk of the growth is driven by China.




Alfie YEO DBS Vickers | Andy SIM CFA DBS Vickers | http://www.dbsvickers.com/ 2017-08-10
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.67 Down 0.720



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