Jumbo Group - Strong Operations in Singapore Should Offset Softer Performance in China

Date: 30/05/2019

Source  :  UOB KayHian
Stock  :  Jumbo       Price Target  :  0.41      |      Price Call  :  HOLD
        Last Price  :  0.38      |      Upside/Downside  :  +0.03 (7.89%)

  • The two newly-opened JUMBO Seafood outlets in Singapore were well received and have turned profitable. In addition, existing Jumbo Seafood outlets continued to fare well and the expansion of other brands are on track.
  • Singapore operations should more than offset the weakness in the China market and provide for decent net profit growth of 17.6% for 2019.
  • Maintain HOLD and PE-based target price of S$0.41. Entry price: S$0.32.

What’s New

Positive response from newly-opened JUMBO Seafood outlets in Singapore.

  • After 10 years, JUMBO GROUP LIMITED (SGX:42R) opened two new Jumbo Seafood outlets in Singapore, one of which is located at ION Orchard (Dec 18) while the second outlet which was launched in Apr 19 is located at Jewel Changi Airport. See Jumbo’s corporation presentation slides at Jumbo Group's Announcements dated 24-May-2019.
  • Despite being smaller outlets, the higher foot traffic at these outlet locations should more than offset the closure of the National Service Resort & Country Club (NSRCC) Seafood outlet in 2018.
  • The outlet opening at Jewel Changi Airport was well received, benefiting from the opening of Jewel which drew a large crowd with 500,000 visitors witnessed during Jewel’s preview period. With Jumbo’s strong brand equity and the tourist traffic flow, we believe the outlet should be able to turn profitable within 1-2 months.
  • Overall, strong performance seen by Jumbo’s Singapore operations, namely the Seafood outlets, managed to offset lower revenues from its China operations.

Further expansion of other brands in Singapore.

  • Jumbo launched two new dining concepts – Zui Yu Xuan (醉宇轩) Teo Chew Cusine and Chao Ting (潮亭) – at Far East Square in Apr 19. This marks a total of three brands that are focused on offering authentic Teochew Cuisine.
  • Zui Yu Xuan Teo Chew Cuisine, which is set up in a two-storey heritage building, is the sister restaurant of Jumbo’s Chui Huay Lim Teochew cuisine outlet, a higher-end restaurant that focuses on capturing the business dining and group gathering crowds. Thus far, the 148-seater outlet has received fairly positive reviews with an estimated average per pax spending of S$55-60.
  • We are positive about this latest expansion as Jumbo is building on its portfolio of brands while maintaining thick gross margins.

JV and franchising route to deepen regional footprint.

  • Jumbo's Seafood franchise restaurant in South Korea marks their first expansion in the country and it is expected to begin operations in Jul 19. Plans are also underway for two more Tsui Wah Hong Kong-styled "Cha Chaan Teng" outlets in Singapore and Ng Ah Sio Bah Kut Teh outlets in China and Taiwan.

Stock Impact

Potential improvement in gross margin.

  • Going forward, we think the closure of under-performing and low-margin stores while expanding through the franchise route should bump up margins.

Positive on latest expansion but we are mindful of weakness in Chinese consumption.

  • We view the long-term growth prospects of Jumbo's Chinese consumption could be a drag on Jumbo's growth in the short term. In addition, more brand awareness in the region which could result in higher account of Jumbo's China exposure and will turn more outlets.

Earnings Revision / Risk

  • No revision to earnings estimates.
  • Risks include a slowdown in sales in China and poor reception at new outlets.

Valuation / Recommendation

  • Maintain HOLD and PE-based target price of S$0.41, pegged to peers' average 2019F PE of 20.0x.
  • Entry price: S$0.32.

Share Price Catalyst

  • Higher-than-anticipated store openings.
  • Franchising deals with regional companies.

Source: UOB Kay Hian Research - 30 May 2019

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