Jumbo Group - UOB Kay Hian 2020-11-30: Challenging Outlook For Singapore Operations; Downgrade To SELL

JUMBO GROUP LIMITED (SGX:42R)

Jumbo Group - Challenging Outlook For Singapore Operations; Downgrade To SELL

Jumbo Group reported a loss of S$8.2m for FY20. The earnings decline was largely attributed to lower revenue (-36.5%) and gross profit margin (-1.6ppt) due to the COVID-19 impact.
We expect a slow recovery for its Singapore operations in FY21 as the return of mass tourism remains uncertain. Jumbo's share price has recovered by 70% since the year’s low in Mar 20. At current Jumbo's share price, valuation appears expensive at 22.1x FY22F PE.
Downgrade Jumbo Group to SELL with target price of S$0.27.

Jumbo Group (SGX:42R) reported full-year loss of S$8.2m. This was below our profit expectations of S$0.5m mainly due to lower-than-expected gross profit (92% of our full-year estimates) and impairments, while operating cost was largely in line. Included in the loss was impairment on financial assets amounting to S$2.3m in relation to the write-off of loans to its associate company in South Korea.
Jumbo Group also recognised S$1.4m of impairment loss on property, plant and equipment for non performing outlets.

Jumbo Group's revenue fell 36.5% y-o-y in FY20 as sales from its Singapore operations fell 45% y-o-y while sales from China fell 22% y-o-y. This was partially offset by revenue of S$6.7m from its Taiwan operations that was consolidated to group revenue in FY20 post the acquisition of a majority stake in Taiwan Jumbo Seafood in Oct 19.
The 60% y-o-y and 54% h-o-h decline of Jumbo Group’s 2HFY20 revenue was largely attributable to the Circuit Breaker measures in Singapore. Furthermore, sales was impacted by:
1. lower footfall for outlets located at tourist spots;
2. lower demand from working crowd and fewer business gatherings; and
3. reduced operating capacity.

Gross profit margin fell 1.2ppt in FY20 to 62.2% as the group engaged in more promotion campaigns and offered greater discounts to attract customers. With cost savings measures, employee benefits expense fell by 33.4% y-o-y and 18.4% y-o-y in 2HFY20 and FY20 respectively.
Jumbo Group also received government grants worth S$6.3m, mainly relating to the Jobs Support Scheme (JSS), and property tax rebates and rental rebates which amounted to $2.5m. Evidently, these measures were unable to fully mitigate the decline in sales.

Going forward, we expect a slow recovery for its operations in Singapore as we are conservative on the return of mass tourism in Singapore in 2021.
Management shared that outlets located at tourist spots, which include two of its highest revenue generating outlets – Jumbo Seafood at Riverside Point and The Riverwalk – continue to experience significant decline in sales due to lower footfall. Dine-in crowds on weekdays, particularly in the central business district area, stay muted on the back of general guidelines encouraging work-from-home arrangements. Furthermore, the seat capacity constraints have also impacted sales for better performing outlets, although this should gradually improve once Singapore moves to phase3.
We also highlight that the JSS in FY21 for Jumbo Group is likely to be lower at around S$1.6m.
Initiatives that Jumbo Group is implementing include offering new products and rolling out high-tea concepts to lengthen revenue generating hours. Jumbo Group is also introducing its new virtual brand, HACK IT, in Dec 20 which is the delivery of more affordable fresh food seafood with Jumbo’s specially created sauce all in a bag to utilise excess resources in weaker performing outlets such as its outlet at The Riverwalk.

Revenue from its operations in China grew by 35% h-o-h and management shared that performance in recent months in the country is close to/higher than pre-COVID-19 levels, mirroring the recovery in China’s economy. Similarly, ever since the group took over the Jumbo Seafood Taiwan operations in Oct 19, the group has seen encouraging performance compared with the same period last year (excluding the impact from the COVID-19 pandemic).
Management shared that Jumbo Group is looking to improve its profitability in China, which has been loss making for the past three years, and is seeing encouraging trends. Expansion plans in FY21 would likely be through an expansion of its franchise network in China, Vietnam and Thailand.

We lower our Jumbo Group's FY21 and FY22 earnings forecast by 50.3% and 26.0% respectively on the back of lower revenue and gross profit as we turn more conservative on the recovery of tourist arrivals in Singapore.
Our FY21 revenue forecast incorporates close to 20% decline from FY19. We also introduce FY23 earnings of S$11m.

See Jumbo Group Share Price; Jumbo Group Target Price; Jumbo Group Analyst Reports; Jumbo Group Dividend History; Jumbo Group Announcements; Jumbo Group Latest News.
Downgrade Jumbo Group to SELL with target price of S$0.27 (previously S$0.23), pegged to 18x FY22F PE or close to 10% discount to peers’ average, as we roll forward our valuation base to FY22 to account for more normalised earnings.
Our downgrade comes as Jumbo's share price has recovered by approximately 70% since the year’s low in Mar 20. At current Jumbo's share price, valuation appears lofty at 22.1x FY22F PE.

Joohijit Kaur UOB Kay Hian Research | John Cheong UOB Kay Hian | https://research.uobkayhian.com/ 2020-11-30

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