Jumbo Group - DBS Research 2019-08-07: One-off Drag From Riverwalk Renovations

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JUMBO GROUP LIMITED (SGX:42R)

Jumbo Group - One-off Drag From Riverwalk Renovations

Maintain BUY, Target Price revised to S$0.47.

• We remain positive on Jumbo Group (SGX:42R) but with a lower Target Price of S$0.47 as we lower our FY19-21F earnings by 11-14% to account for one-off drag on revenue and gross profit from a 4-week long renovation at the Jumbo Seafood outlet at Riverwalk, and as we tweak our sales assumptions generally. Excluding the impact of the renovations, we estimate that 3Q19 earnings was in line.
• Our investment view for the stock remains intact albeit our earnings forecasts are recalibrated lower. We see that Singapore operations will continue to do well from the closure of lower-margin stores and opening of higher-end and higher footfall restaurant outlets. We also anticipate that performance of new stores would be strongly led by Jumbo Seafood ION, and Jumbo Seafood Jewel, with Zui Yu Xuan Teochew Cuisine’s performance expected to improve.
• The stock’s valuation is attractive, trading at 17-19x (pre-exceptional) forward PE (equivalent to -1 SD of its mean PE) and offers a decent dividend yield of 3.8% for FY20F. See Jumbo Group's dividend history.

Where we differ.

• Our FY19F earnings is below consensus as we factor in loss of revenue and gross profit from the renovations at Riverwalk outlet.

Potential catalyst.

• Faster–than-expected outlet expansion, especially in China, and regional franchises are potential stock catalysts provided its cost structure does not deteriorate considerably.
• More franchise outlets should also deliver better growth once the number of outlets attains critical mass.
• The better performance of China outlets could also lift earnings.

WHAT’S NEW - One-off drag from Riverwalk outlet renovations

3Q19 earnings and margins below as Riverwalk outlet is undergoing renovations for four weeks:

• Jumbo Group's core 3Q19 earnings of S$1.52m (-32.8% y-o-y) was below our forecast as margins missed our expectations. This is largely due to the 4- week closure of Jumbo Seafood Riverwalk for renovation.
• Revenue was higher at S$36.4m (+1.5% y-o-y) led by new stores – Jumbo Seafood Jewel and Zui Yu Xuan Teochew Cuisine/Chao Ting Teochew Pao Fan. The absence of contribution from the Riverwalk outlet led to lower than expected margins. Excluding the impact of the renovations, earnings would have been largely in line.

Gross margins below expectations but in line after adding back Riverwalk’s potential contribution:

• Gross margin was higher at 62.3% (+0.3 ppt y-o-y) from slightly better contribution of franchise income. But this was lower than our expectations as we were anticipating more franchise income contribution. The absence of Jumbo Seafood Riverwalk’s contribution also played a part in the lower margins, since Jumbo Seafood’s gross margins tend to be higher than average.
• Both gross margins and gross profit would have been in line with our estimates if we add back our estimate of Riverwalk’s 4-week revenue and margin contribution.

Operating margins below, impacted by loss of gross profit, as opex remained intact:

• Operating profit was S$1.73m (-8.8% y-o-y), within expectations. Operating margin was below our forecast at 4.8% (-0.5ppt) on lower gross profit. The Riverwalk outlet continued to incur operating expenses throughout the renovation, leading to lower overall operating margins.
• The increase in operating cost was largely due to higher staff and rent expenses on opening of new outlets.

Singapore operations offset weaker performance of overseas outlets:

• Singapore outlets continue to do well especially the new outlets in Jewel and ION Orchard, while Zui Yu Xuan is still making a small loss. China operations meanwhile continue to be challenging.
• JV income registered losses of S$0.3m from slower performance of Jumbo Seafood Taiwan.
• We now anticipate overall impact to be a slight net profit growth for FY19F.

Cut FY19-21F earnings by 11-15%:

• The Riverwalk renovations has impacted our numbers and we estimate loss of S$1.5m in sales and c.S$1.2m in gross profit. The impact would have flowed straight to operating profit since operating expenses continued to be incurred during the renovations. The lower operating profit for 3QFY19 is one-off, and the Riverwalk outlet has resumed operations with a stronger table turn. Factoring the renovation, we are lowering our FY19F earnings by 14%.
• We also lower our FY20F earnings by a smaller 11%, with revenue growth rate maintained at 8% but growing from a smaller FY19F revenue base. Our FY21F earnings is also reduced by 11% with revenue and earnings growth rates maintained at around 5- 6%.

Maintain BUY and S$0.47 Target Price.

• Our Target Price is lowered from S$0.51 to S$0.47 based on 23x FY20F PE, rolling over from 23x on FY19-20F blended earnings base.
• We continue to be positive on Jumbo Group underpinned by improving Singapore performance in the coming quarters. While Singapore operations is on an earnings recovery path, an earlier than expected earnings turnaround in China would be another driver for the stock.
• Jumbo Group’s valuation is attractive, trading at 17-19x (pre-exceptional) forward PE (equivalent to -1 SD of its mean PE) and offers a decent dividend yield of 3.8% for FY20F.

Alfie YEO DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2019-08-07

SGX Stock Analyst Report BUY MAINTAIN BUY 0.47 DOWN 0.510