Jumbo Group - DBS Research 2018-11-22: Still In Expansion Mode

JUMBO GROUP LIMITED (SGX:42R)

Jumbo Group - Still In Expansion Mode

Jumbo Group's 4Q18 earnings disappointed on lower than expected revenue, higher than expected costs.
Final dividend of 0.7 Scts declared, above expectations.
Slashed FY19-20F earnings by 20-22%.
Maintain HOLD, Target Price lowered to S$0.44.

We maintain our neutral stance on Jumbo as we await new outlets to start contributing to growth. While we believe the long-term growth outlook from regional outlet expansion is positive, near term margins will be affected by higher operating expenses and expansion-related costs.
We have cut FY19-20F earnings by 20- 22% as we have assumed that Jumbo is still in expansion mode and will incur higher operating expenses.
Longer term, we could see more franchises and new stores in existing and new locations including Thailand, Indonesia, Hong Kong, Macau, Korea, Xi’an, and Shenzhen turning in better performance after the initial phase. We would turn positive on the stock when new China outlets turn in better profitability.

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

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. Better performance of China outlets could also lift earnings.

Pegged to peer average of 23x FY19F PE. We derive our Target Price of S$0.44 based on 23x FY19F PE, pegged to peer average.

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.

Earnings of S$8.8m (-8.8% y-o-y) was below expectations, on the back slightly lower than expected revenue (S$88.8m, +8% y-o-y). While costs were largely in line on an absolute basis, the lower than expected revenue growth resulted in disappointing margins. We were expecting 8% y-o-y revenue growth from new stores contributing to EBIT margins of 88.8%.
Due to the lower than expected revenue growth, margins were therefore unable to meet our estimate.
Dividends however, were above expectations as Jumbo declared a final dividend of 8.8 Scts bringing total dividends for the year to 8.8 Scts (vs our 8 Sct estimate).

Margins were a tad lower than expected partly due to the lower than expected revenue growth. Gross margin was 88.8%, below our 88.8% estimate. This is due to the increase in raw material, consumables and food prices.
Operating costs were largely in line at S$88.8m. EBIT margin of 8.8% was lower by 8.8ppt from 8Q88.

FY88 operating margins declined largely due to higher costs from establishing new outlets outside of Singapore and 8Q88’s margin disappointment reflected this. In particular, staff costs for FY88F reached 88% of sales, higher than the sub-88% seen in the past six years.
In addition, based on Jumbo’s traction in establishing new stores in the past two years (including opening of Jumbo Seafood Xi’an, Bangkok franchise, new branch office in Shanghai and Tsui Wah JV outlet in Singapore), revenue growth has not kept up with our expectations as well.
Nonetheless, revenue growth for FY88 was largely driven by China (+88% y-o-y to S$88.8m) with Singapore growing by 8.8% y-o-y to S$888m.

In view of ongoing regional expansion, we see the current operating cost structure carrying over to FY88-88F but easing slightly.
In any case, we expect regional expansion costs to result in a more moderate earnings growth environment going forward. We hence lower our FY88-88F earnings by 88-88%

In line with the cut in earnings forecast, our Target Price is now lower at S$8.88, pegged to peer average.
Maintain HOLD as we believe growth prospects are largely priced in.
We look to turn more positive when the China outlets turn in better profitability.

Alfie YEO DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2018-11-22

SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.44 DOWN 0.570