Jumbo Group - UOB Kay Hian 2019-02-18: 1QFY19 Results Below Expectations; Awaiting Ramp-Up Of New Outlets

JUMBO GROUP LIMITED (SGX:42R)

Jumbo Group - 1QFY19: Results Below Expectations; Awaiting Ramp-Up Of New Outlets

Jumbo’s 1QFY19 results came in below expectations, representing 17.9% of our full-year estimate.
While 1QFY19 revenue dipped 1.5% y-o-y due to the closure of underperforming outlets, net profit rose 15.7% y-o-y after accounting for losses attributable to minority interests.
Jumbo continues to expand nicely in the region through a series of JVs and franchise agreements.
Maintain HOLD with a lower PE- based target price of S$0.41. Entry price: S$0.37.

JUMBO GROUP LIMITED (SGX:42R)’s 1QFY19 net profit of S$2.4m (+15.7% y-o-y) is below our expectations. 1QFY19 revenue dipped to S$35.5m, down 1.5% y-o-y, with the decline attributable to closure of underperforming outlets in Singapore.
1QFY19 attributable net profit rose to S$2.4m (+15.7% y-o-y) after accounting for losses attributable to minority interests.

In 1QFY19, gross margin increased marginally y-o-y to 6.37% and improved 1.0ppt q-o-q. The improvement was attributable to higher franchise income.
Salaries decreased 1.1% while utilities and depreciation rose 7.3% and 18.8% y-o-y respectively in 1QFY19. Utilities and depreciation rose in tandem with higher electricity and gas prices in Singapore as well as new outlets in China.

Jumbo opened its new Jumbo Seafood outlet at ION Orchard before its seasonally strong second quarter, which historically represents 27-29% of full-year sales for the group. Management revealed that rents were secured at favourable rates and expect profit margins to be similar to that of other Jumbo Seafood restaurants.

Going forward, Jumbo targets to open more outlets in Singapore to drive growth in its Singapore operations.
In the next six months, Jumbo intends to open one Jumbo Seafood restaurant, one Teochew cuisine restaurant and at least two more Tsui Wah Cha Chaan Teng outlets in Singapore.

We view the long-term growth prospects of Jumbo’s expansion positively and believe more franchises or outlets will be opened in regions outside of Beijing and Shanghai. However, recent weakness in consumer confidence arising from worries about jobs had led to the lowest rate of nationwide sales growth during the Chinese New Year period in a decade. This was despite the fact that the Chinese government rolled out a slew of incentives to boost purchase of consumer goods and spur overall spending to offset the effects of the trade friction with the US.
We remain cautious on Jumbo’s China exposure and will turn positive when outlets begin to show better profitability.

We tweak our net profit estimate S$13.0m (-3.0%), S$14.5m (-3.3%) and S$15.1m (-3.2%) for FY19-21 respectively to account for higher operating cost for leases as a result of expansion plans in Singapore and near term weakness in the China market.
Risks include a slowdown in sales in China and poor reception to new outlets.

Maintain HOLD with a lower PE-based target price of S$0.41, pegged to peers’ average 2019F PE of 20.0x.
We have switched our valuation methodology to PE to better capture the near-term earnings outlook. Entry price is S$0.37.

Yeo Hai Wei UOB Kay Hian Research | John Cheong UOB Kay Hian | https://research.uobkayhian.com/ 2019-02-18

SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.41 DOWN 0.420