Jumbo Group (JUMBO SP) - UOB Kay Hian 2018-05-16: 2QFY18 Results Below Expectations; Higher Cost Base To Support Expansion

JUMBO GROUP LIMITED SGX: 42R

Jumbo Group (JUMBO SP) - 2QFY18 Results Below Expectations; Higher Cost Base To Support Expansion

Jumbo Group's 2QFY18 results came in below expectations. Net profit fell 30% y-o-y due to higher salaries and higher other operating expenses.
On the back of a higher cost base, the group continues to see revenue growth from the Singapore and Chinese seafood operations. The expansion comes with short-term costs to Jumbo.
Maintain HOLD with a lower DCF-based target price of S$0.53 (previously S$0.59).

2QFY18 results below our expectations. For 2QFY18, Jumbo Group (Jumbo) recorded a 6% y-o-y increase in sales to S$41.7m (2QFY17: S$39.4m), attributed to higher sales from operations in Singapore (+S$0.8m y-o-y) and China (+S$1.5m y-o-y). But net profit fell 27.0% y-o-y to S$4.3m 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. The group is now operating on a much higher cost base to support expansion activities.
Higher cost base to support regional expansion. Salaries, operating lease expenses and other operating expenses rose 25.8%, 5.8% and 16.2% respectively y-o-y in 2QFY18. The group incurred higher salary expenses due to an overall increase in headcount in Singapore and China to support regional expansion.
Operating leases increased 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 for the group’s 30th anniversary which included a big lucky draw.

Expected seasonally strong 2QFY18 but disappointed. On the back of a higher cost base, 2QFY18 performance disappointed as typically, the second quarter is Jumbo’s strongest quarter due to the Chinese New Year festive season. A 50bp y-o-y gross margin contraction suggests that promotional activities remain elevated and have yet to normalise, which is looking to be the case for FY18.
The long-term growth story remains intact however as reception in China remains strong while Singapore is still showing marginal growth. The group has secured a joint venture to establish and operate the famous Hong Kong style café under the Tsui Wah brand in Singapore for 10 plus 10 years. Tsui Wah is a strong brand in North Asia with 32 outlets in Hong Kong, 35 outlets in China and 3 outlets in Macau, all operating under the same brand. Jumbo will hold a 49% stake in the JV.
Jumbo’s franchising opportunities continue to gain momentum as the group will commence operation of its second Taiwanese Jumbo Seafood outlet in Taichung.
Tweaking outlet forecast. We tweak our outlet rollout for FY18 as we now assume only one new outlet in Shanghai and one in Beijing. Previously, we were assuming a new outlet in Singapore for FY18.

We lower our FY18-20 core profit estimates by 12.5%, 13.2% and 9.5% as we lower our gross margin assumptions and increase our employee benefit expense assumptions. We have also remove expectation of a new outlet in Singapore for FY18.
Key risks include a slowdown in sales in China and poor reception at new outlets.

Maintain HOLD with a lower DCF-based target price of S$0.53 (previously S$0.59). Suggested entry price is S$0.48.

Nicholas Leow UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | https://research.uobkayhian.com/ 2018-05-16

SGX Stock Analyst Report HOLD Maintain HOLD 0.53 Down 0.590