Jumbo Group (JUMBO SP) - UOB Kay Hian 2017-11-28: FY17 Results Below Expectations, Dragged By Higher Operating Cost

JUMBO GROUP LIMITED 42R.SI

Jumbo Group (JUMBO SP) - FY17 Results Below Expectations, Dragged By Higher Operating Cost

Jumbo Group’s full-year FY17 results came in below expectations. Net profit fell 6.7% on the back of higher operating expenses, salaries and a S$1m expense in relation to the celebration of the group’s 30th anniversary.
Jumbo continues to expand nicely in China and the region through a series of JVs and franchise agreements.
Maintain HOLD with a DCF-based target price of S$0.60. Suggested entry price: S$0.54.

For FY17, Jumbo Group (Jumbo) recorded a net profit to equity holders of S$14.5m (-6.7% yoy). Sales rose 6.1% yoy from S$136.8m in FY16 to S$145.1m in FY17 due to an overall increase in sales from operations in Singapore and China coupled with a full year of contribution from the third Jumbo Seafood outlet in Shanghai.
Gross margins remained relatively stable at 63.4% in FY17 vs 63.2% in FY16 even as Jumbo continues to expand in China, demonstrating the group’s brand equity.
Net margins came down significantly to 10% in FY17 vs 11.3% in FY16 due to higher operating lease expenses, higher employee benefit expenses and a S$1m expense in relation to the group’s 30th anniversary celebration which included monthly lucky draws, celebration dinners and gifts.

Salary expenses, operating lease expenses and depreciation expense rose 6.4%, 16.7% and 29.9% respectively yoy in FY17. Jumbo incurred higher salary expenses due to an overall increase in headcount and remuneration to support regional expansion.
Operating leases increased by S$2.0m for FY17 due to additional floor space for new outlets and new corporate offices in Singapore and Shanghai.
Depreciation expense rose in tandem with the new outlets and corporate offices.

Jumbo’s regional expansion efforts have been going smoothly as the group has opened a total of three very successful outlets in Shanghai, while its maiden outlet in Beijing was opened in Jul 17 and two franchisee agreements have already been secured in Vietnam and Taiwan. The group has earmarked potential franchise agreements in Indonesia, Thailand, South Korea, Hong Kong and Macau for 2018-2022.
Jumbo will continue to target opening new outlets in China to replicate its success in Shanghai. For the years 2018-22, Jumbo has targeted 1- 2 new possible outlets in Shanghai and 1-2 new possible outlets in Beijing with the potential to expand into other first-tier cities such as Shenzhen through JVs or a franchisee model.

As the MRT construction at the mall is obstructing foot traffic, management has made the decision to close its Jpot outlet at Parkway Parade Singapore.
The company continues to be on the lookout for new seafood restaurant space in Singapore. We believe potential locations could include areas near the central business district as Jumbo does not have a strong presence there.

We lower our FY18-19 core net profit estimates by 16-23% on the back of higher salaries, higher rental and lower sales due to the closure of Jpot Parkway Parade. Even though we have slashed our earnings, we have more visibility on Jumbo’s forward expansion plans.
We assume 1 new outlet in Singapore, 1 in Beijing and 1 in Shanghai for FY18, 1 new outlet in Beijing and 1 in Shanghai each for FY19 and FY20. This is up from only 1 new outlet in Beijing for FY18-20.
Key risks include a slowdown in sales in China outlets.

Maintain HOLD and DCF-based target price of S$0.60. Suggested entry price is S$0.54.

Nicholas Leow UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-11-28

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