Jumbo Group - DBS Research 2018-08-14: Await New Outlets To Contribute 

Jumbo Group - DBS Group Research 2018-08-14: Await New Outlets To Contribute  JUMBO GROUP LIMITED SGX:42R

Jumbo Group - Await New Outlets To Contribute 

  • Jumbo Group’s 3Q18 earnings below on higher than expected opex.
  • In expansion mode, expect cost pressures on near term outlook for now.
  • Trimmed FY18-20F earnings by 5-13%.
  • Maintain HOLD, S$0.57 Target Price based on 23x FY19F PE.

Maintain HOLD with slightly lower Target Price of S$0.57.

  • We maintain our HOLD rating on Jumbo as we await new outlets to start contributing to growth.
  • While we believe long term growth from regional outlet expansion is positive, near term margin outlook will be affected by higher operating expenses and expansion-related costs.
  • Longer term, we could see more franchises and new stores in Thailand, Indonesia, Hong Kong Macau, Korea, Xi’an, and Shenzhen. However, Jumbo is facing higher costs and margin pressure for now as it is still at an early growth stage, setting up franchise/JV partnerships regionally.
  • We have lowered FY18-20F earnings by 5-13% as we have assumed lower operating margins. Jumbo currently trades at 21.3x FY19F earnings, in line with its peer average. Maintain HOLD as growth expectations are priced in, and outlook is dampened by higher operating costs. 

Where we differ:

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  • Our earnings are below consensus. This is largely due our expectations of a higher operating cost structure ahead, led by rents and depreciation. 

Potential catalyst.

  • Faster than expected outlet expansion especially in China and regional franchises are potential stock catalysts provided cost structure does not deteriorate considerably. 
  • More franchise outlets should also deliver better growth once the number of outlets attain critical mass. 


  • Pegged to historical average of 23x FY19F PE. We derive our Target Price of S$0.57 based on 23x FY19F PE, rolling over from blended FY18-19F earnings base and pegged to Jumbo’s historical average PE. 

Key Risks to Our View: 

  • Apart from operational risks, we see failure to deliver growth in China as a key risk to our earnings growth projection. Singapore’s business is stable while the bulk of the growth is driven by China. 

WHAT’S NEW - 3Q18 results

Earnings below on lower than expected revenue, higher costs:

  • Jumbo’s 3Q18 earnings of S$2.2m (-35% y-o-y) for 3Q18 were below expectations. Revenue was also slightly below at S$35.8m (+2.9% y-o-y). Costs increased this quarter leading to lower gross and operating margins, and earnings disappointment.

Singapore leads revenue disappointment:

  • Jumbo’s 3Q18 revenue was slightly below expectations. Growth of 2.9% y-o-y was largely driven by China sales, which had the benefit of a full quarter’s revenue from two new Beijing and Shanghai outlets and one new outlet in Xi’an which opened in May. 
  • Singapore sales meanwhile decreased led by three outlet closures (two Ng Ah Sio Bak Kut Teh in March and April and Parkway Parade JPOT outlet in September).

Lower gross margins:

  • Gross margins were lower at 62% (-0.7ppt) mainly due to higher fresh seafood costs and promotional prices at new Jumbo Seafood outlets in Xi’an and Shanghai.

Higher than expected operating expenses:

  • Operating expenses were 13.2% higher at S$20.3m. The increase was mainly due to staff costs and other operating expenses. The increase in staff costs was the result of expansion and higher headcount, while higher operating expenses were due to expansion of China’s corporate office and marketing expenses.

Expansion continues:

  • We see 3Q18 numbers largely as a reflection of Jumbo’s expansion phase. Jumbo has increased its footprint very quickly since listing at end-2015. Jumbo now has presence in Beijing, Shanghai, Xi’an, Da Nang, Bangkok, Taipei, with possible new outlets in Shenzhen. 
  • New franchises include China Fuzhou, Korea, Hong Kong, Macau and Indonesia. New outlet plans for Singapore include a new JUMBO Seafood restaurant, one Teochew cuisine restaurant and at least two more Tsui Wah outlets. Costs have therefore increased in line with expansion plans. 
  • Growth and earnings contribution should kick in once new outlets become profitable.

Lower FY18-20F earnings by 5-13%:

  • We expect to see operating margins and earnings growth dampened by higher operating expenses in the near term and hence impute higher opex and lower our net profit forecast by 5-13% for FY18- 20F.
  • The earnings cut stems from both lower revenue and lower operating margin assumptions.

Maintain HOLD, lower Target Price to S$0.57: 

  • In line with the cut in earnings forecast, our Target Price is now lower at S$0.57, pegged to 23x FY19F PE (derived from Jumbo’s historical PE average). We have rolled over our valuation to FY19F from a blended FY18-19F base.
  • Maintain HOLD as growth prospects are largely priced in.

Alfie YEO DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2018-08-14
SGX Stock Analyst Report HOLD Maintain HOLD 0.57 Down 0.580