Jumbo Group - DBS Research 2017-11-27: Higher Opex To Dampen Growth

Jumbo Group - DBS Vickers 2017-11-27: Higher Opex To Dampen Growth JUMBO GROUP LIMITED 42R.SI

Jumbo Group - Higher Opex To Dampen Growth

  • Jumbo Group's FY17 earnings below estimates led by higher operating costs.
  • Final and special dividend of 0.5 and 0.7 Scts above expectations.
  • Cut FY18-19F earnings by 4-9% due to higher opex assumptions.
  • Maintain HOLD with lower TP S$0.61.

Maintain HOLD with lower TP of S$0.61. 

  • While outlook remains positive led by its regional store expansion, expansion-related costs have led to higher operating expenses and lower operating margins. We believe Jumbo is at an early growth stage regionally with franchise/JV partnerships established in Vietnam, Taiwan and Beijing this year. 
  • We could see more franchises and new stores in Thailand, Indonesia, Hong Kong Macau, Korea, Xi’an, and Shenzhen. These initiatives will likely add to cost and margin pressures in the near term. We have hence lowered our earnings as we expect lower operating margins going forward. Jumbo currently trades at 21.9x FY18F.
  • Maintain HOLD as growth expectations are priced in, and outlook is dampened by higher operating costs.

Where we differ. Our earnings are below consensus. 

  • This is largely due our expectations of a higher operating cost structure ahead, led by rents and depreciation.

Potential catalyst. 

  • Faster than expected outlet expansion especially in China and regional franchises are potential stock catalysts 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.


  • Pegged to peers’ average of 23x FY18F PE. Jumbo is trading in line with regional peers at 21.9x FY18F PE. 
  • We derive our TP of S$0.61 based on 23x FY18F PE, pegged to Jumbo’s historical average PE.

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.

WHAT’S NEW - FY17 and 4Q17 results 

Earnings below on higher than expected opex: 

  • Earnings of S$2.6m (-37% y-o-y) for 4Q17 were below expectations. While revenue of S$38.2m (+14.1% y-o-y) was in line with expectations, higher than expected operating expenses S$20.6m (+16.2%) led to lower operating profit of S$3.2m (- 31%) and margins of 8.6% (-5.6ppt). 
  • Final and special dividends of 0.5 and 0.7 Scts declared, totaling 1.2 Scts per share, above our 1 Sct final dividend expectation.

Revenue and gross margins in line: 

  • Revenue was in line with expectations. Growth of 14.1%/6.1% y-o-y for 4Q17/FY17 was largely driven by China sales, which posted 27% y-o-y growth from FY16 to FY17. Gross margins also remained stable at 63.4% (+0.2ppt) in FY17.
  • Higher than expected operating expenses Jumbo’s underperformance in FY17 and 4Q17 was largely due to higher than expected other operating expenses which include marketing and transport. 
  • Jumbo had inked deals with local partners in Beijing, Vietnam and Taiwan this year to establish more Jumbo Seafood outlets. Along with startup costs in the new outlets, these have collectively contributed to higher operating expenses and lower operating margins.

Expansion strategy on track: 

  • Jumbo’s JV/franchise deals for Jumbo Seafood this year included Vietnam (franchise rights for HCMC and Da Nang), Beijing (51% JV with Beijing Hualian Group), and Taiwan (49% JV with Baipin Co. Ltd).
  • These should deliver earnings over the next few years. More possible franchises include Thailand, Indonesia, Hong Kong Macau, and Korea markets. New Jumbo Seafood stores may also possibly open in Xi’an and Shenzhen.

Lower FY18-19F earnings by 4-9%: 

  • While no significant nearterm impact is expected, we believe the above developments set the stage for future growth overseas. 
  • Near term, we expect to see operating margins and earnings growth dampened by higher operating expenses and hence impute higher opex in our FY18-19F earnings. We have cut our net profit forecast by 4-9% for FY18-19F.

Maintain HOLD, lower TP to S$0.61: 

  • In line with the cut in earnings forecast, our TP is now lower at S$0.61, pegged to 23x FY18F PE (derived from Jumbo’s historical PE average).
  • Maintain HOLD as growth prospects are largely priced in.

Alfie YEO DBS Vickers | Andy SIM CFA DBS Vickers | http://www.dbsvickers.com/ 2017-11-27
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.61 Down 0.670