Jumbo Group (JUMBO SP) - UOB Kay Hian 2017-08-11: 3Q17 Results Below Expectations

Jumbo Group (JUMBO SP) - UOB Kay Hian 2017-08-11: 3Q17 Results Below Expectations JUMBO GROUP LIMITED 42R.SI

Jumbo Group (JUMBO SP) - 3Q17 Results Below Expectations

  • Jumbo reported its latest 3Q17 results which came in below expectations. 
  • Once again, the story seems to be the same with Singapore reporting weakness in the bak kut teh and hotpot segments while business at the East Coast Park flagship seems to be slow. 
  • China continues to be the bright spot for the group with the three outlets in Shanghai doing well. 
  • Maintain HOLD but with a slightly lower DCF-based target price of S$0.60. Suggested entry price: S$0.54.



RESULTS


3QFY17 results below our expectations. 

  • For 3QFY17, Jumbo recorded a net profit to equity holders of S$3.4m (-1.1% qoq). Sales rose 6.4% yoy from S$32.7m in 2Q16 to S$34.8m in 2Q17 due to the inclusion of the new Bak Kut Teh outlet at Resorts World Sentosa (RWS), expansion of the Riverside Walk outlet in Clarke Quay and growth in the Shanghai outlets. 
  • The group is experiencing weakness in the bak kut teh (BKT) and JPot segments due to increased competition from the myriad of competing brands. 
  • Business at the East Coast Seafood restaurant has been slow which we attribute to the new Marine Cove area at East Coast Park which was redeveloped and opened to the public in June last year. 
  • Our channel checks at the Marine Cove area indicate that the area is crowded and well-utilised and may have cannibalised crowds from other areas in East Coast Park.

A higher cost base. 

  • The group’s salary expenses, operating lease expenses and depreciation expense rose 5.5%, 24.5% and 29.8% respectively yoy in 2QFY17. The group incurred higher salary expenses due to added headcount at the expanded Riverside Walk outlet, RWS BKT outlet and at its corporate headquarters. 
  • Operating lease expenses rose due to the new RWS outlet and the new corporate office while depreciation expenses rose in tandem with the new outlets and office.


STOCK IMPACT


East Coast flagship outlet seeing slower sales. 

  • National Parks Board (NParks) announced in July that they will be upgrading certain sites in East Coast Park with more open spaces and improvements by end-19. The sites are former Goldkist Chalets, Big Splash and Raintree Cove. 
  • The aim is to redistribute the crowds and reduce congestion at the Marine Cove high-activity zone. This could hopefully bring a new lease of life back to the East Coast Seafood Centre and the flagship outlet which have been seeing lower foot traffic.

Regional expansion going smooth. 

  • Jumbo has opened its first seafood outlet in Beijing through a JV with Beijing Hualian Group in Jul 17. The outlet is located within the Beijing SKP, a high-end luxury fashion mall within the central business district. Clientele of this outlet will comprise financial and expatriate communities as well as tourists similar to its clientele for its IFC mall outlet in Shanghai. 
  • The Beijing SKP outlet occupies a floor area of 6,500 sq ft which sits 158 pax. The outlet has received overwhelmingly positive comments with a 5/5 star rating on Dianping.com and average spend of Rmb474 per pax which is in line with the per pax spending at the IFC Shanghai (Rmb489 per pax) outlet.
  • Jumbo continues to be on the lookout for additional opportunities to expand regionally either through JVs, franchising or strategic alliances. Given the positive performance in China so far, we expect more new outlets to be opened in China in FY18.


EARNINGS REVISION/RISK

  • We lower our FY17-19 core net profit estimates by 3.7-7.3% on the back of higher costs.
  • We also remove our projection of a new outlet in Singapore for FY17 and assume 1 new outlet in Singapore and 2 in Shanghai in FY18.
  • Key risks include a slowdown in sales in China outlets.


VALUATION/RECOMMENDATION

  • Maintain HOLD with a lower DCF based target price of S$0.60 (previously S$0.64).
  • Suggested entry price is S$0.54.


SHARE PRICE CATALYST

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




Nicholas Leow UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-08-11
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 0.60 Down 0.640



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