UOB will turn positive on Jumbo once new outlets start to show profitability

SINGAPORE (Feb 18): UOB Kay Hian is maintaining its “hold” call on Jumbo Group with a target price of 41 cents, following the group’s 1Q19 results announcement.

For 1Q19, the group reported a 15.7% rise y-o-y in its earnings to $2.4 million, while revenue dropped 1.5% to $35.5 million, due to the closure of its underperforming outlets.

During the quarter, gross margin increased slightly y-o-y to 6.37%, attributable to higher franchise income. The group also reported higher cost base to support its regional expansion.

See: Jumbo reports 15.7% rise in 1Q earnings to $2.4 mil

Jumbo recently opened its new JUMBO Seafood outlet at ION Orchard, representing its first outlet opening in Singapore in 10 years. Management revealed that rents were secured at favourable rates and expect profit margins to be similar to that of other Jumbo Seafood restaurants.

Going forward, the group expects to open more outlets in Singapore to drive growth in its local operations. In the next six months, it intends to open one Jumbo Seafood restaurant, one Teochew cuisine restaurant and at least two more Tsui Wah Cha Chaan Teng outlets in Singapore.

This morning, the group also announced that it will be brining Jumbo Seafood restaurant to South Korea via a 50:50 joint venture between its indirect wholly-owned subsidiary, Jumbo F&B Services, with TCI Inc.

The first Jumbo Seafood restaurant in South Korea is scheduled to be operational in Seoul by 3Q19.

See: Jumbo Seafood expands to South Korea with 50:50 JV; first restaurant to open by 3Q19

In a Monday report, analyst Yeo Hai Wei says, “We view the long-term growth prospects of Jumbo’s expansion positively and believe more franchises or outlets will be opened in regions outside of Beijing and Shanghai.”

However, recent weakness in consumer confidence arising from worries about jobs had led to the lowest rate of nationwide sales growth during the Chinese New Year period in a decade, despite the Chinese government rolling out initiatives to boost purchase and spur overall spending to offset effects of the US-China trade friction.

“We remain cautious on Jumbo’s China exposure and will turn positive when outlets begin to show better profitability,” adds Yeo.

As at 11.55am, shares in Jumbo are trading at 41 cents or 3.8 times FY19 book with a dividend yield of 3.4%.