Jumbo Group - DBS Research 2019-02-14: A Mixed Bag


Jumbo Group - A Mixed Bag

  • Jumbo Group's 1QFY19 earnings in line, store closures and franchise income helped to lift margins. 
  • Cost and competition challenges still apparent. 
  • Local and regional outlet expansion on the cards. 
  • Maintain HOLD, Target Price S$0.44. 

Maintain HOLD and Target Price of S$0.44.

  • We maintain our neutral stance on JUMBO GROUP LIMITED (SGX:42R) as we await new outlets to deliver better earnings.
  • While long-term growth outlook will stem from regional outlet expansion, we are mindful of near term start-up costs and keen competition in Singapore’s foodservice sector impeding growth. Revenue declined on the back of store closures, but this led to an improvement in core margins.
  • Regional and local expansion continues to be in play with a new ION outlet and plans for 4 more outlets to open in Singapore, with more franchise outlet opportunities potentially to come from existing and new locations including Thailand, Indonesia, Hong Kong, Macau, Korea, and Xi’an.

Where We Differ:

  • Our earnings are below consensus. This is largely due to 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. 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.

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 - 1QFY19 results in line

1QFY19 earnings in line, gross margins improve from contribution of franchise revenue:

  • Jumbo Group's 1Q19 earnings of S$2.4m (+15.7% y-o-y) was within expectations on lower revenue of S$35.5m (-1.5% y-o-y). The lower revenue and better margins were largely due to store closures and contribution of franchise income. Profit before tax was flat at S$2.56m (+0.4% y-o-y) as operating profit improvement was mitigated by a fair value loss of investment.
  • Higher minority interest helped to lift earnings by +15.7% y-o-y. If not for the minority interest, earnings would have been flat, even after enjoying underperforming store closures and franchise income contribution.

Franchise contribution helps lift gross margins, operating costs remain flat:

  • Gross margins were better at 63.7% vs FY18’s 62.7% despite declining slightly by 0.3% y-o-y. Operating profit grew slightly by 1.5% y-o-y to S$2.75m as operating costs remained relatively flat at S$19.8m (+0.7% y-o-y). EBIT margin was slightly higher by 0.3ppt to 7.8%. Staff costs was lower at S$11.2m (-1.1% y-o-y), and lower leases expenses (S$3.3m, -7.2% y-o-y) came from store closures.
  • These were offset by a collective 9.3% y-o-y increase in utilities, depreciation (new Xi’an outlet) and other operating expenses to S$2m.

Growth to be supplemented by new outlets:

  • This set of results is in line, and earnings were supported by store closures of at least four underperforming outlets (two Bak Kut Teh and two JPOT outlets) and some franchise revenue.Singapore retail sales for restaurants were mixed for the large part in 2018 before seeing y-o-y improvement from August to December.
  • Outlook remains challenging as restaurant operators contend with competition and challenging operating costs for rents and labour. Despite this, we believe its new Jumbo Seafood outlet at ION Orchard and another outlet due to open nearby will be positive to Jumbo Group. It still plans to open one Chui Huay Lim Teochew restaurant and two more Tsui Wah “Cha Chaan Teng” outlets in Singapore. Plans are also underway to relocate its National Service Resort Country Club (NSRCC) outlet to Jewel at Changi Airport.
  • There could potentially be new franchise opportunities in Korea, Hong Kong, Macau and Indonesia in addition to more outlets in existing franchised cities of Taiwan, Thailand, and Vietnam.

Maintain HOLD and S$0.44 Target Price.

  • There is no change in earnings as this set of results is in line. Our HOLD rating and Target Price of S$0.44 are maintained.
  • We look to turn more positive on stronger growth in core profits.

Andy SIM CFA DBS Group Research | Alfie YEO DBS Research | https://www.dbsvickers.com/ 2019-02-14
SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.440 SAME 0.440