Jumbo Group - DBS Research 2020-02-06: Over-correction Presents Opportunity


Jumbo Group - Over-correction Presents Opportunity

  • Expect earnings to be negatively impacted by Coronavirus, but selldown could be overdone.
  • Valuation attractive at -1.5SD its historical forward PE after factoring in FY20-21F earnings cuts of 10-20%.
  • Estimates are already anticipating slower footfall and less optimistic earnings outlook in Singapore and China.

Maintain BUY, Target Price revised to S$0.38.

  • We reiterate BUY on Jumbo Group (SGX:42R) as we believe the selldown due to coronavirus is overdone.
  • Jumbo Group Share Price has corrected by -16% YTD since China alerted WHO of several cases of pneumonia in Wuhan leading to the shutdown of Huannan Seafood Wholesale Market on New Year’s Day. Having factored in a potential earnings drop, from lower footfall in Singapore and China resulting in revenue and earnings decline, we believe Jumbo Group’s valuations are now at an attractive level of 17.2x FY21F PE and at -1.5SD of its mean historical PE range.
  • Operationally, we see growth for FY21F coming from better operating efficiencies and scale from its Singapore outlets and recovery of China into profitability.

As a China play and proxy to tourism, Jumbo is exposed to potential effects of the coronavirus

How many of Jumbo’s visitors are tourists?

  • We expect Jumbo Group’s operations to be affected by the potential slowdown in regional travel, tourist arrivals and less robust dining amongst locals as some deliberately avoid crowded areas and unnecessary social interaction. We estimate that about half of diners at Jumbo Seafood restaurants are tourists and are hence anticipating a potential slowdown in earnings going forward.

How much is Jumbo’s exposure in China?

  • Jumbo Group is also in China, where the epicentre of the virus outbreak is. Its China contribution to revenue was 18% in FY19. Singapore accounted for 82% of FY19 revenue, comprising largely of Jumbo Seafood Singapore at 64%, Ng Ah Sio Bak Kut Teh and Teochew restaurants at 6% and 9% respectively, and other miscellaneous revenue (Franchise, Jpot and JCafe) at 3%. However, China accounted for close to 0% of FY19 net profit due to its startup costs for newly opened outlets and current unprofitable status of some stores.

Where are Jumbo outlets located in China?

  • Jumbo Group operates nine owned, franchised and JV outlets across China in Shanghai, Beijing, Xi'an, Fuzhou, and none in Hubei province and Wuhan city. Jumbo Group has no outlets in Wuhan, which is undergoing lockdown. It has six directly operated stores in China including Jumbo Seafood and Ng Ah Sio Bak Kut Teh in Shanghai, one Jumbo Seafood in Beijing, one in Xian and Jumbo Seafood franchise outlet in Fuzhou.

Expect tourist arrivals and cut in social activities to affect sales and earnings

Expect less robust outlook for FY21F.

  • We anticipate overall revenue to be less robust led by
    1. Singapore operations due to an anticipated drop in tourist arrivals and reduction in social activities; and
    2. drop in footfall of China outlets.

Singapore retail sales and tourist arrivals declined during SARS in 2003.

  • Singapore’s retail sales for F&B and restaurants declined during the SARS period in 2003. Culling of travel plans (see decline in tourist arrivals at Singapore Changi), outdoor avoidance and staying home for fear of catching the virus might have led to decline in retail sales and restaurant sales. The decline was however temporary as activities resumed gradually over the next 6-12 months. Singapore authorities promoted activities and offered relief packages for impacted industries, which supported the pickup.

Cut FY20-21F earnings by 10-20% on impact of coronavirus

Factoring in revenue loss for an assumed four-month period.

  • We assume four months of negative impact on F&B in Singapore and China, taking reference from SARS, with a more conservative view. Based on our estimates, we see earnings decline of 10-20% for FY20-21F. We lower our FY20F revenue from our previous estimates by 8% as we applied a four-month decline in sales for both Singapore and China, imputing sales decline over that four-month period.
  • Our net profit forecast has declined by a higher magnitude due to lower operating margins from relatively fixed operating costs such as staff and rental expenses. This results in a slight y-o-y net profit decline of 14% for FY20F. We however anticipate earnings recovery of 16% y-o-y in FY21F due to lower FY20F earnings base.

Core operations for growth remain strong.

  • Disregarding the coronavirus, we were otherwise expecting to see better performance operationally. Singapore’s outlets are expected to deliver better margins with the full 12-month benefit for FY20F over
    1. recently opened outlets including Jewel and Zui Yu Xuan Teochew Restaurant at Far East Square; and
    2. closing non-performing outlets such as JCafe and JPot in FY19F.
  • Although China has been incurring losses for Jumbo Group due to slow ramp-up and gestation period, operations are on track for breakeven and profitability both this year and the next.

Valuations are attractive even after factoring in earnings cut

Stock trading at attractive valuation, maintain BUY with S$0.38 Target Price.

Alfie YEO DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2020-02-06
SGX Stock Analyst Report BUY MAINTAIN BUY 0.38 DOWN 0.470