Jumbo Group - CGS-CIMB Research 2019-08-26: Time To Tuck In


Jumbo Group - Time To Tuck In

  • Stronger profit contributions from Jumbo Group’s Singapore outlets could offset the weakness in the China market in FY9/19-20F.
  • Jumbo Group is actively expanding its overseas footprint via JV and franchising too. Jumbo Group may return to net profit growth in 4QFY19 as its Riverwalk store resumes operations.
  • We resume coverage with an ADD and Target Price of S$0.47.

Singapore operations to drive earnings growth in FY19/20F

  • We expect Jumbo Group (SGX:42R)’s Singapore operations to be the main earnings driver in FY19/20F, post the closure of lower-margin stores and opening of higher-end, higher footfall outlets.
  • The two Jumbo Seafood stores that commenced operations in FY9/19 (Ion Orchard and Jewel Changi Airport) saw strong sales ramp-up; and could contribute positively to the bottomline in FY19F, in our view.
  • We forecast other Singapore Jumbo Seafood stores to record 3% SSSG in FY19F, helped by continued tourist arrival growth (especially from North Asia). We forecast revenue from Singapore’s Jumbo Seafood restaurants (c.65% revenue contribution) to grow 6.7% y-o-y in FY19F, driving overall growth of 0.9% y-o-y.

Expanding overseas footprint through JV and franchising model

  • Jumbo Group added three Jumbo Seafood franchise outlets (Bangkok, Fuzhou and Seoul) and two Bak Kut Teh (BKT) franchise stores in Taiwan in FY9/19F. As of end-Jul 2019, it has a total of nine franchised stores (6 Jumbo Seafood, 3 BKT).
  • We believe Jumbo Seafood stores in Seoul, Bangkok and Ho Chi Minh are performing well, and expect Jumbo to expand its presence in these cities in the near term.
  • We expect Jumbo Group to add 5-6 franchise outlets per year, and franchise income to contribute 1.1% of revenue in FY20F.

China operations still weak, but less of a margin drag in FY20F

  • Jumbo Group’s China operations remain challenged in 3Q19 with SSSG decline, which was attributed to
    1. weaker consumer spending, and
    2. lack of brand awareness.
  • Jumbo Group is actively optimising its cost structure of its China operations; we believe Jumbo could carry out more marketing plans to boost brand awareness and explore the conversion of weaker performing stores into other dining concepts. While it may take time for Jumbo Group’s seafood restaurants in China to return to profitability, we forecast losses for the China operations to peak in FY19F, and be less of a drag in coming years.
  • We cut our FY19- 21F EPS by 3.5-9.4% to factor in weaker China operations and Riverwalk store closure.

Resume coverage with an ADD rating and Target Price of S$0.47

  • Jumbo Group’s earnings could return to growth in 4QFY19 as its Riverwalk store resumes operations post a 4-week renovation, in our view.
  • We resume coverage with an ADD call on Jumbo Group in view of robust growth ahead. Our Target Price of S$0.47 is based on 20.4x CY20F P/E (0.75 s.d. below Jumbo Group’s historical average P/E), which is slightly above regional peers’ average of 18.8x. See attached 14-page PDF report for complete analysis.
  • Re-rating catalysts include faster than expected ramp up of newly opened stores, and expansion of franchised outlets.
  • A key downside risk is slower than expected turnaround in Jumbo Group’s China operations.

ONG Khang Chuen CGS-CIMB Research | https://research.itradecimb.com/ 2019-08-26
SGX Stock Analyst Report ADD MAINTAIN ADD 0.47 DOWN 0.520