Jumbo Group (JUMBO SP) - UOB Kay Hian 2018-02-19: 1QFY18 Results Below Expectations; More Promotions And Higher Operating Cost

Jumbo Group (JUMBO SP) - UOB Kay Hian 2018-02-19: 1QFY18 Results Below Expectations; More Promotions And Higher Operating Cost JUMBO GROUP LIMITED 42R.SI

Jumbo Group (JUMBO SP) - 1QFY18 Results Below Expectations; More Promotions And Higher Operating Cost

  • Jumbo’s 1QFY18 results came in below expectations. Net profit fell 19.8% on the back of higher operating expenses, salaries and higher promotional activities.
  • Jumbo continues to expand nicely in China and the region through a series of JVs and franchise agreements. 
  • Maintain HOLD with a lower DCF-based target price of S$0.59 (previously S$0.60). Suggested entry price: S$0.53.


1QFY18 results below our expectations. 

  • For 1QFY18, Jumbo recorded a 9.3% y-o-y increase in sales to S$35.7m vs S$32.7m in 1QFY17. The increase in sales was attributable to an overall increase in sales from the group’s operations in Singapore and China. 
  • Net profit on the other hand, fell 19.8% y-o-y in 1QFY18 to S$2.1m due to higher operational expenses, higher salaries to support new outlets and higher promotional activities in Singapore and for the fourth outlet in Shanghai at L’Avenue Mall. 
  • Gross margins were negatively impacted mainly due to aggressive promotions for high-value food items such as Alaskan crab in Singapore and new outlet promotions at the fourth outlet in Shanghai.

A higher cost base to support regional expansion. 

  • Salary expenses, operating lease expenses and other operating expenses rose 12.2%, 8.3% and 18.2% respectively y-o-y in 1QFY18. The group incurred higher salary expenses due to an overall increase in headcount and remuneration to support regional expansion. 
  • Operating leases increased for 1QFY18 due to additional floor space for new outlets and new corporate offices in Singapore and Shanghai. 
  • Other operating expenses rose due to more aggressive promotions, marketing activities and celebrations due to the group’s 30th anniversary which includes a big lucky draw.


Positive reception to new outlet. 

  • In late-Nov 17, Jumbo announced the opening of its fourth outlet in Shanghai at L’Avenue Mall. So far, the outlet has received very positive reviews with an average 5-star rating from 213 reviews, while the new outlet in SKP Mall in Beijing has also garnered strong reviews on Dianping.com with an average 5-star rating from 652 reviews. However, the per-pax spending at L’Avenue Mall has been similar to that of Raffles City Shanghai, which leads us to believe that it caters more to families as opposed to the outlets at iAPM Mall and IFC Shanghai which cater to the corporate crowd. 
  • We expect the higher promotional activities to normalise by 3QFY18.

Seasonally strong 2QFY18 unlikely to disappoint. 

  • Historically, Jumbo has seen earnings peak in the second quarter of each financial year due to the Chinese New Year festivities in Singapore and China. We expect a lower level of promotional and marketing activities going into 2QFY18. 
  • In 2QFY17, Jumbo recorded a net profit of S$6m or about 40% of full-year net profit.

Outlet forecast remains unchanged. 

  • We keep our outlet forecast assumption unchanged at one new outlet in Singapore, one in Beijing and one in Shanghai by endFY18.
  • We expect any new outlets in Singapore to be opened in the vicinity of the Central Business District (CBD) as Jumbo has seen strong success in China with this strategy of catering to a corporate crowd, and they also lack much presence in the CBD area.


  • We lower our FY18 core earnings estimate by 3.6% as we lower our gross margin assumption slightly and increase our other operating expenses assumption. We have also tweaked our per-pax spending in China upward to about S$70.
  • Key risks include a slowdown in sales in China outlets and poor reception from new outlet openings.


  • Maintain HOLD with a DCF-based target price of S$0.59. 
  • Suggested entry price is S$0.53.


  • 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/ 2018-02-19
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 0.59 Down 0.600