Jumbo Group - UOB Kay Hian 2020-02-13: Novel Coronavirus To Impact Earnings; Downgrade To HOLD

JUMBO GROUP LIMITED (SGX:42R)

Jumbo Group - Novel Coronavirus To Impact Earnings; Downgrade To HOLD

We expect Jumbo Group (SGX:42R)’s earnings to be negatively impacted by the outbreak of the novel coronavirus 2019 due to lower tourist arrivals in Singapore and the shutdown of restaurants and retail outlets in China.
We also note that the outbreak comes at an unfortunate timing for Jumbo Group as its fiscal second quarter is typically a seasonally stronger quarter (contributes > 30% of earnings).

Downgrade to HOLD with a lower PE-based target price of S$0.32. Entry price: S$0.29.

Jumbo Group (SGX:42R) has nine outlets (including JVs and franchises) in China, of which five are Jumbo Seafood restaurants and one is a recently converted Jumbo Kitchen restaurant. The outlets are in Shanghai (6), Beijing (1), Xi’an (1) and Fuzhou (1). Its operations in China contributed to 18% of total revenue for FY19, however, it was loss-making for the year due to some unprofitable outlets.
While Jumbo Group has no outlets in Wuhan, we understand that some of its outlets in China have been instructed to be closed by the local authorities or shopping malls that house the outlets.

After the first case of SARS in Mar 03 in Singapore, tourist arrivals in Singapore saw double-digit y-o-y declines for six months. Similarly, tourism-linked sectors such as Singapore’s F&B service suffered declines over the same period. Amid the growing number of confirmed coronavirus cases, the Singapore Tourism Board expects visitor arrivals to Singapore to fall 25-30% y-o-y in 2020.

We reckon that Jumbo Group’s operations in Singapore, particular its Jumbo Seafood restaurant that is well known among tourists, would see a drop in sales as tourist arrivals in Singapore decline. Further, as flight arrivals in Changi Airport decline, we believe the weak footfall would impact restaurants and retail outlets in Jewel Changi, including that of Jumbo Seafood. Its other outlets may also see a smaller business dining and group gathering crowd (for business meetings/social gatherings) as companies limit corporate events and locals avoid dining out in fear of contracting the virus.
We note that Jumbo Seafood Singapore was the group’s’ largest revenue contributor at 64% in FY19 while its Teochew restaurants and Ng Ah Sio Bak Kuh Teh outlets contributed 9% and 6% respectively.

The timing of the outbreak comes at an unfortunate time for Jumbo Group as the first quarter of the year (Jumbo Group’s fiscal second quarter) is typically a seasonally stronger quarter for the group where the outlets experience higher business volume due to the Chinese New Year.
In the past four years, Jumbo Group’s fiscal second quarter contributed to 37-40% of the group’s full-year earnings. We reckon there could have been cancellations after media reports regarding the novel coronavirus surfaced before Chinese New Year.

Apart from softening revenue, we expect margins to contract due to fixed operating costs such as rent and staff cost. That said, Jumbo Group may be able to restructure its workforce to adjust to the lower business volume and possibly obtain rent subsidies from landlords to lower its fixed costs.

We cut our net profit estimates for FY20-22 to S$9.8m (-29.2%), S$12.9m (-11.9%) and S$13.8m (-10.7%) respectively as we lower our revenue estimates by 14.5%, 5.3% and 4.8%. Our revenue estimates incorporate one quarter of decline in revenue for its China and Singapore operations, and flat growth for the rest of the year.

Downgrade to HOLD with a lower target price of S$0.32 (previously S$0.44), pegged to peers' average 2020F PE of 21x. Entry price is S$0.29.
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Stronger-than-expected performance from new outlets and higher-than-anticipated store nings.

Joohijit Kaur UOB Kay Hian Research | John Cheong UOB Kay Hian | https://research.uobkayhian.com/ 2020-02-13

SGX Stock Analyst Report HOLD DOWNGRADE BUY 0.32 DOWN 0.440