Jumbo Group - UOB Kay Hian 2020-04-23: Severely Hit By COVID-19 Outbreak


Jumbo Group - Severely Hit By COVID-19 Outbreak

  • Amid the COVID 19 outbreak, we expect a huge impact to Jumbo Group (SGX:42R)’s revenue as it largely caters to tourist and corporate dining crowds; additionally, social distancing measures, including the two-month long circuit breaker, will further reduce business volume. Earnings impact is further exacerbated by high fixed costs.
  • We reduce our FY20-21 net profit forecasts by 95.3% and 28.0%.
  • Maintain HOLD with a lower PE- based target price of S$0.23.
  • Entry price: S$0.20.

F&B services significantly hit by steep decline in tourist arrivals and social distancing measures.

  • In an effort to contain the COVID-19 outbreak that has escalated into a global pandemic, the government has rolled out a series of stricter travel measures over the past 2 months. The latest being a ban on all short-term visitors entering or transiting through Singapore since 24 Mar 20.
  • Footfall at restaurants has also seen a decline as local residence avoid dining out. Latest industry data include the Singapore’s F&B services index that declined 16.6% y-o-y in Feb 20 with restaurants being among the hardest hit at –29.1% y-o-y.

Jumbo operations impacted by fall in tourist arrivals.

  • Jumbo Seafood Singapore, Jumbo Group’s largest revenue contributor at 64% in FY19, has been hit hard by the outbreak as tourist and corporate dining forms a majority of its dining crowd. We think this is also the case for its full service Teochew restaurants (9% of FY19 revenue) and outlets located at famous tourist spots.
  • For the two-month long circuit breaker, Jumbo Group has decided to temporarily close 9 out of its 15 outlets in Singapore thus far (3 Jumbo Seafood, 2 Teochew outlets, 3 NASBKT outlets, 1 Tsui Wah outlet ).
  • Steps that Jumbo Group has taken to pivot its business direction and draw in sales include introducing bento boxes priced at S$10.80-12.80 per pax in its Jumbo Seafood outlets and partnering with delivery platforms to boost online sales.
  • For its China operations (18% of revenue in FY19), while the situation in the country has stabilised, we expect losses to widen as footfall recovery would take some time.

Fixed cost puts further toll on earnings, partially offset by budget relief measures.

  • Historically, Jumbo Group has a monthly operating expenses (employee benefit expense, operating lease, utilities and other operating expense) of approximately S$5.5m-6.5m, or 50-52% of Jumbo Group’s revenue, with close to 60% of it being employee benefit expenses. With measures introduced in the three budget rounds, we estimate cost savings of S$4m or 34% of Jumbo’s 2019 earnings.
  • Additionally, given the lower business volume, internal cost savings measures that Jumbo Group has implemented include reducing operating hours, lowering staff cost (in the form of no pay leave, reducing reliance of part-time staff, lowering overtime pay) and negotiating with landlords.
  • That said, given the high fixed cost structure, in addition to the fall in sales, we expect a slightly above breakeven position of S$0.5m.

Jumbo's healthy balance sheet provides strong cash buffer.

  • Jumbo Group has a net cash of S$46.6m and zero debt as of end of FY19, equivalent to 30% of its market capitalisation, providing the group with a large enough cash buffer to weather tough times.

Earnings Revision

  • We lower our net profit estimates for FY20, FY21 and FY22 to S$0.5m (-95.3%), S$8.9m (- 30.8%) and S$12.9m (-6.5%) respectively as we decrease our revenue estimates by 26.6%, 12.3% and 3.2%.
  • Our FY20 earnings forecast accounts for a decent four months of operations (Oct 19 – Jan 20) and a subsequent 50% decline in revenue for the remainder of the year. We also include an estimated S$4m cash grant as part of the budget relief measures announced.
  • Maintain HOLD with a lower target price of S$0.23 (previously S$0.32), pegged to 2021F PE of 16.6x, or 10% discount to peers’ average as we roll our valuation base to 2021.
  • Entry price is S$0.20.
  • See Jumbo Group Share PriceJumbo Group Target PriceJumbo Group Analyst ReportsJumbo Group Dividend HistoryJumbo Group AnnouncementsJumbo Group Latest News
  • Share price catalysts: Stronger-than-expected recovery from COVID 19 impact, improvement in cost structure.

Joohijit Kaur UOB Kay Hian Research | John Cheong UOB Kay Hian | https://research.uobkayhian.com/ 2020-04-23
SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.23 DOWN 0.320