Jumbo Group Ltd (JUMBO SP) - Maybank Kim Eng 2018-02-15: Temporary Drag From Expansion Costs

Jumbo Group Ltd (JUMBO SP) - Maybank Kim Eng 2018-02-15: Temporary Drag From Expansion Costs JUMBO GROUP LIMITED 42R.SI

Jumbo Group Ltd (JUMBO SP) - Temporary Drag From Expansion Costs


Laying the foundation for a better future 

  • 1Q18 earnings fell 20% y-o-y and met only 12% of our FY18E and 13% of consensus due mainly to expansion/pre-opening costs, as well as seasonal factors. 
  • The company pointed to pre-opening costs for two new outlets in end-4Q17, the expansion of its corporate office in China, and one-off marketing expenses. It is noteworthy that topline growth was the best 1Q ever reported at 9.3% y-o-y. 
  • Strong revenue growth and new store openings bodes well for 2Q, as Jumbo enters the peak season, which typically forms 40% of full-year earnings. 
  • Maintain BUY and DCF-based Target Price of SGD0.70 (WACC 9%), implying 26x FY18E EPS, on par with regional peers.


Front-loaded start-up costs of two new outlets 

  • The main drag on earnings was due to pre-opening costs of two new outlets, Shanghai L’Avenue Mall outlet on 28 Nov 2017 and Taipei outlet on 16 Dec 2017. The associate line reported a SGD0.2m loss, due to startup losses in Taiwan. 
  • In addition, Jumbo also incurred a one-off marketing expense for its 30th Anniversary celebrations, which cost c.SGD0.2m per quarter; this is expected to end after 2Q18.


Robust topline growth, especially from China 

  • The robust topline growth of 9.3% y-o-y was driven by both the Singapore and China markets, at +SGD1.3m and +SGD1.7m, respectively. However, China’s y-o-y growth was much higher, at 38% vs Singapore’s 5% due to a lower base and the opening of two new outlets in Beijing and Shanghai.


Expect catch up during 2Q18 onwards 

  • We expect the full quarter contribution of the two new outlets started in late-4Q17 to notably improve earnings. 
  • In addition, the elimination of temporary start-up promotions for the new outlets should also help to reduce costs. Also, the new stores should see a surge in customer traffic due to the peak Chinese New Year in 2Q18.


Swing Factors


Upside

  • Better-than-expected Singapore and China sales, especially from new outlets.
  • Lower-than-expected food and staff costs that could lead to better-than-expected margins.
  • Expectations of higher dividends or articulation of a dividend policy.
  • Expansion success, especially in overseas markets, such as China, Taiwan and Vietnam.

Downside

  • Any changes in China’s food-safety laws that could affect China’s imports of mud crabs.
  • Shortage of critical ingredients for its signature dishes: crabs, other seafood.
  • Epidemics or health scares that can damage its reputation, eg mass food poisoning, salmonella.
  • Poor execution of expansion, including major delays in opening of and longer-than-expected breakeven for new outlets.




John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2018-02-15
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 0.700 Same 0.700



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