Jumbo Group - UOB Kay Hian 2018-08-14: 3QFY18 Results Below Expectations; Awaiting Regional Expansion

Jumbo Group - UOB Kay Hian Research 2018-08-14: 3qfy18 Results Below Expectations; Awaiting Regional Expansion JUMBO GROUP LIMITED SGX:42R

Jumbo Group - 3QFY18 Results Below Expectations; Awaiting Regional Expansion

  • Jumbo’s 3QFY18 net profit came in below expectation, representing 15.7% of our full-year estimate. Net profit declined 34.5% y-o-y as revenue growth from Chinese operations was nullified by higher input costs and operating expenses.
  • Earnings will likely remain weak in FY18 as we await execution and earnings from new outlets.
  • Maintain HOLD with a lower DCF-based target price of S$0.49 as we incorporate a higher risk-free rate of 2.75%. Suggested entry price: S$0.44.



3QFY18 RESULTS


3QFY18 results below expectations.

  • Jumbo Group’s (Jumbo) 3QFY18 net profit of S$2.2m (-34.5% y-o-y) was below our expectation. Revenue grew to S$35.8m (or +2.9% y-o-y) and the increase was attributed to operations in China (+S$1.8m y-o-y) but this was partially offset by weakness from Singapore operations (-S$0.8m y-o-y).
  • Attributable net profit declined (-S$1.2m or 34.5% y-o-y) due to higher promotional expenses and higher salaries to support new outlets and more promotional activities.


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Higher cost base and promotional activities to support regional expansion.

  • Gross margin slipped 0.7% due to higher input costs and promotional prices for Jumbo Xi’An and Shanghai. Staff costs and other operating expense surged 9.8% y-o-y and 40.6% y-o-y respectively. The increase in staff cost was attributed to an increase in headcount for new outlets in China as well as for corporate offices in China and Singapore to support regional expansion.
  • Other operating expenses rose in tandem with the expansion in outlet count as well as China’s corporate office and marketing expenses relating to the group’s 30th anniversary celebrations.


STOCK IMPACT


Earnings likely to remain weak in FY18 but building for the future.

  • FY18 is panning out to be an expansionary year for Jumbo. Earnings are likely to remain weak as the company incurs start-up costs in relation to new outlet openings and promotional activities.

Ng Ah Sio Bak Kut Teh outlet in Taiwan, the first of many.

  • Ng Ah Sio Bak Kut Teh (NAS) outlets, known for its peppery bak kut teh broth, opened its first outlet in Taipei, Taiwan in Jul 18. The franchisee, Ho Sing, has secured franchisee rights to establish and operate Ng Ah Sio Bak Kut Teh in Taiwan for 10+10 years. Ho Sing has committed to opening at least 20 NAS outlets in Taiwan.
  • Ng Ah Sio Bak Kut Teh is well-known among Taiwanese food blogs as one of the three most popular bak kut teh brands from Singapore. Former Taiwanese President Ma Ying-jeou was also a customer during one of his visits to Singapore. We think the cultural curiosity towards Singaporean/ Malaysian Chinese cuisine and brand awareness generated within Taiwan should result in positive reviews going forward.

Tweaking outlet forecast.

  • We tweak our outlet count assumption for FY18 as we now assume zero new outlets in Shanghai and Beijing. Previously, we were assuming a new outlet each in Shanghai and Beijing for FY18.


EARNINGS REVISION/RISK

  • We lower our FY18-20 core net profit estimates to S$10.9m (- 22.1%), S$13.6m (-13.9%) and S$15.0m (-12.3%) as we lower our gross margin assumptions and increase employee benefit expense assumptions. 
  • We have also removed expectations of new outlets in Shanghai and Beijing for FY18. 
  • We have not factored in Tsui Wah outlets into our forecasts and await results from execution.
  • Risks include a slowdown in China outlet sales and poor reception at the new outlets.


VALUATION/RECOMMENDATION


Maintain HOLD with a lower DCF-based target price of S$0.49.

  • We factored in a higher risk-free rate of 2.75% (previously 2.5%), in line with our house view. Suggested entry price is S$0.44.


SHARE PRICE CATALYST

  • Higher-than-anticipated store openings.
  • Franchising deals with regional companies.





Singapore Research UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-08-14
SGX Stock Analyst Report HOLD Maintain HOLD 0.49 Down 0.530



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