Jumbo Group - DBS Research 2018-05-15: Incurring Higher Costs In Expansion Phase

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JUMBO GROUP LIMITED SGX: 42R

Jumbo Group - Incurring Higher Costs In Expansion Phase

• Jumbo Group's 2Q18 slightly below on higher staff costs.
• Interim DPS of 0.5 Scts declared.
• Trimmed FY18-19F earnings by 6% each.
• Maintain HOLD and Target Price of S$0.58 based on 23x blended FY18F/19F earnings.

What’s New 

2Q18 slightly below.

• Jumbo Group's 2Q18 earnings of S$4.3m (-27% y-o-y) slightly trailed our FY18F estimates. 
• Revenue was S$S$41.7m (+6% y-o-y), contributed by China outlets including two new outlets in Beijing and Shanghai. 
• Gross margin was 63.3% (-0.6ppt) on pricier fresh seafood. 
• Operating profit declined 24.6% y-o-y to S$4.8m on higher opex, particularly staff costs. 
• An interim DPS of 0.5 Scts was declared, in line with expectations. 

Higher operating expenses.

• Staff costs increased 26% to S$13m. The higher staff cost has been a result of overseas expansion, largely for new outlets in Shanghai, Beijing and at Singapore and China headquarters. 
• Operating lease expenses increased a slower 5.8% y-o-y to S$3.7m as Jumbo secured favourable rental rates for new outlets in China. 
• Other operating expenses increased by 16% y-o-y to S$4m on more marketing and promotional expenses. Operating margins consequently fell from 16.2% to 11.5%. 

In expansion mode.

• Jumbo now has four outlets in Shanghai and one in Beijing, with one in Xi’an due to open in June 2018. A second franchise outlet after Da Nang Vietnam will open in Taichung Taiwan in late 2018. It has already formed a JV to operate Hong Kong’s Tsui Wah Cha Chaan Teng in Singapore and the first outlet is expected to open in June. 
• We expect a few more outlets to open going forward. 

Maintain HOLD and S$0.58 Target Price.

• We have trimmed our FY18-19F earnings by 6% in each year to account for weaker 2Q18 numbers. Our Target Price is maintained at S$0.58 as we rollover our valuation from 23x FY18F PE to blended FY18F/19F PE. 
• Jumbo is still in an expansion phase, incurring start-up costs, as well as marketing and promotional expenses for new outlets which are a drag to profitability for now. We look to turn positive when new regional franchises and partnerships contribute more meaningfully to overall earnings. 

Alfie YEO DBS Vickers | Andy SIM CFA DBS Vickers | https://www.dbsvickers.com/ 2018-05-15

SGX Stock Analyst Report HOLD Maintain HOLD 0.580 Same 0.580