Jumbo Group - DBS Research 2021-05-19: Overpriced; Recovery Deferred


Jumbo Group - Overpriced; Recovery Deferred

  • Market is overpricing Jumbo Group (SGX:42R) at 28x FY22F earnings.
  • Near-term recovery outlook weighed by Heightened Alert and absence of tourists.
  • Recovery assumptions deferred by one year to FY23F, slash FY21F earnings by 43%.
  • Maintain FULLY VALUED and target price of S$0.21.

More downside given dimmer near-term outlook

Maintain FULLY VALUED on Jumbo Group and target price at S$0.21.

  • We believe that the valuation for Jumbo Group (SGX:42R) is mispriced and the market is overvaluing the stock. Jumbo Group’s book value stands at 7- 8 cents per share with net cash of 3.3 cents per share (as at 1H21), supporting just ~10% of the current Jumbo Group's Share Price.
  • We project weak near-term earnings, with a FY21F net loss, a partial recovery in FY22F, before making a full recovery from FY23F onwards. Based on our current earnings projections, the market is valuing Jumbo Group at 28.0x FY22F P/E and 15.8x FY23F P/E, which we believe is overvalued and pricing it at normalised earnings way ahead of the COVID-19 recovery.

Awaiting critical factor to play out – the lifting of travel restrictions.

  • Our recovery scenario is premised on the lifting of travel restrictions and tourists returning to Singapore. Jumbo Group’s main revenue and earnings are derived from Singapore, particularly Jumbo Seafood. We estimate that pre-COVID-19, tourists made up about half of Jumbo Seafood Singapore’s diners. The absence of tourists in Singapore now and also in the near term will weigh on Jumbo Group’s recovery.

1H21 performance was disappointing.

  • Net losses of S$4.3m were below our expectations. We had expected FY21F to be a recovery year, rebounding from 2H20 losses. Although a sequential q-o-q earnings improvement was seen, the pace was more muted than expected.
  • Jumbo Group's revenue declined by 31.9% y-o-y to S$45.4m largely led by Singapore (S$26.3m, -52% y-o-y), offset by China (S$15m, +66% y-o-y) and Taiwan (S$4.1m, +23% y-o-y) the revenues. Although operating losses of S$5.7m narrowed from 2H20, it underperformed 1H20’s breakeven operating profit level.
  • No interim dividends were declared by Jumbo Group.

Restaurant retail sales recovery will remain challenging with the Heightened Alert.

  • Singapore retail sales for restaurants have been lagging that of its other F&B Foodservice peers due to their dine-in nature, restrictions to group sizes and limited capacity. Restaurant sales fell by as much as 70% y-o-y in April and May 2020 at the height of the 2020 Circuit Breaker, before improving to declines of between -20% and -30% in Phases 1 to 3 of the reopening from June 2020 to January 2021. Prior to that, in February and March 2021, restaurant sales grew by 9% and 18% y-o-y respectively.
  • With the Heightened Alert now in force, we expect restaurant sales to decline and post flat y-o-y performance for the months of May and June, as we see consumption levels for restaurants reverting to Phases 1 and 2 levels.

Earnings recovery deferred.

  • Jumbo Group’s year-end is September and the Heightened Alert has now dented recovery in May and June. Reasonably, we expect a slower pace of recovery than before for 2H21. We have hence lowered our FY21F earnings forecast to a S$5.3m loss (from S$7.6m profit) for Jumbo Group in view of the weaker-than-expected 1H21 earnings and slower recovery for 2H21. We have also slashed our FY22F earnings forecast from S$13m to S$7.5m as we assume FY22F to be a partial recovery year (deferred from FY21F previously). We have reduced our recovery assumptions for sales per store in FY22F to account for partial year recovery as opposed to near pre-COVID-19 levels previously.
  • We do not see pressure on cashflows due to
    1. the restaurant consumption is recovering from its worst performance in FY20, with 1H21 has already generated positive operating cashflows on the back of minimal Jobs Support Scheme government subsidies;
    2. we expect improving cashflows based on our recovery trajectory assumption that restaurant consumption will recover in FY22F on the road to normalisation, in addition to Jumbo Group’s new strategy of positioning away from the tourist segment towards to mass market segment; and
    3. a recovery scenario would generally support cashflows (with the exception of severe adverse shocks such as COVID-19) as Jumbo Group’s F&B outlets are cash generative on a normal operating basis, paying suppliers on credit while collecting cash receipts upfront.
  • We expect cashflows to improve while our recovery scenario plays out.

Positioning away from tourist demand into mass-market segment.

  • We believe recovery should occur in FY23F with vaccines being administered, on the view that travel restrictions should ease by then. Meanwhile, Jumbo Group has re-strategised to reduce its presence in tourist areas including Jumbo Seafood Riverwalk, and Ng Ah Sio Bak Kut Teh outlets at Marina Bay Sands and Resorts World Sentosa, while making inroads into the mass-market segment with newly acquired Kok Kee Wanton Noodle and Ng Ah Sio Bak Kut Teh opening in the heartlands.
  • See
  • We believe Jumbo Group will need time to scale the mass-market business into profitability. For now, our earnings forecast takes the view of a gradual recovery to normalisation in FY23F. Our target price for Jumbo Group is S$0.21 based on 18x FY22F P/E (from FY21F previously) and is pegged to -1.5 standard deviation of its historical average forward P/E.
  • We maintain our FULLY VALUED call for Jumbo Group.

Alfie YEO DBS Group Research | https://www.dbsvickers.com/ 2021-05-19