Jumbo Group Ltd - Maybank Kim Eng 2018-05-15: Expansion Cost Pain For Long Term Gain

Jumbo Group Ltd - Maybank Kim Eng 2018-05-15: Expansion Cost Pain For Longterm Gain JUMBO GROUP LIMITED SGX: 42R

Jumbo Group Ltd - Expansion Cost Pain For Longterm Gain


Core earnings missed; Cut FY18-20E EPS and Target Price

  • Jumbo Group's core earnings during 6M18 missed our and consensus estimates by 10 - 12%. 2Q18 earnings fell 27% y-o-y, mainly due to marketing and expansion costs, including higher-than-expected staff costs and other operating expenses at its HQ office in China. 
  • On the bright side, 2Q18 revenue continued to grow by 6% y-o-y from two new outlets in China. 
  • We cut our FY18-20E EPS by 20-24% in anticipation of higher staff costs for further expansion. Accordingly, our DCF-based Target Price fell 7% to SGD0.65 (WACC 9%, LTG 2%), implying multiples of 33x/26x FY18/19E EPS. 
  • Despite the earnings weakness, we continue to like Jumbo’s established brand and scalable business model.



Remains committed to growth

  • Jumbo continues to grow its China HQ office and operational team to further penetrate the domestic market. With a presence only in two cities, Shanghai and Beijing, it targets to expand into more cities; Jumbo targets to open its sixth JUMBO Seafood outlet in the city of Xi’an by June 2018. We understand that it will be forming a JV with a local partner to leverage off their expertise and local connections. 
  • In Singapore during Mar 2018, it announced a JV with Tsui Wah. The first outlet is expected to open in Jun 2018. We understand that it is also targeting to expand its own existing F&B brands in Singapore.


Exploring more franchising opportunities

  • Outside of Singapore and China, Jumbo continues to explore more franchising opportunities to scale up its JUMBO Seafood brand. It targets to open a second franchise outlet in late-2018 in Taichung, Taiwan. Jumbo is also exploring other countries, including Vietnam, Thailand and Hong Kong.


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, e.g. 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 | https://www.maybank-ke.com.sg/ 2018-05-15
SGX Stock Analyst Report BUY Maintain BUY 0.65 Down 0.700



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