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

JUMBO GROUP LIMITED SGX: 42R

Jumbo Group Ltd - Expansion Cost Pain For Longterm Gain

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.

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.

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.

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.

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