• Jumbo Group's 4QFY19 net profit of S$2.6m (+4.6% y-o-y) is largely within expectations. While revenue came in flat, declining 0.1% y-o-y in FY19, net profit grew 5.9% y-o-y, mainly due to higher gross and operating margins on cost efficiencies.
• We expect a better FY20 on stronger contributions from the Singapore operations and higher margins.
• Upgrade to BUY with a higher target price of S$0.44 as we roll over valuation to FY20 (20.3x FY20F PE).

Fy19 Results

4QFY19 results largely within expectations.

• JUMBO GROUP (SGX:42R)'s 4QFY19 net profit of S$2.6m (+4.6% y-o-y) is in line with our expectations, with full-year net profit forming 97% of our and consensus estimates. Singapore operations remained a stronghold with revenue rising by S$4.0m in FY19 (+3.3% y-o-y), backed by two new Jumbo Seafood restaurants and a new Teochew cuisine restaurant.
• Contributions from the new outlets managed to offset closure of other restaurants - the JPOT brand and the NSRCC Jumbo Seafood outlet.
• However, full-year revenue came in flat, declining 0.1% y-o-y, dragged by China operations which recorded a 13% y-o-y decline in revenue.

Earnings growth led by margin expansion.

• Jumbo Group's full-year net profit growth of 5.9% y-o-y to S$11.7m was mainly due to cost savings leading to higher gross and operating margins. Gross margin rose 1.0ppt from 62.8% in FY18 to 63.8% in FY19. We believe this could be due to an increase in franchise income that is booked under revenue, as well as better cost control from supply chain efficiencies.
• Another bright spot is the 0.6% y-o-y decrease in employee benefit expense despite the increase in the total number of outlets. Management noted that this was the result of improvement in manpower productivity.
• Overall net margin increased to 7.6% in FY19 (FY18: 7.2%).

Unchanged dividend per share.

• Jumbo Group proposed a final dividend of 0.7 S cents per share, bringing full-year dividend to 1.2 S cents with a total dividend payout ratio of 66%. While this is slightly lower than the 70% in FY18, absolute dividend per share remains unchanged.
• We forecast the same level of dividend for FY20 which translates into a decent dividend yield of 3.2% at current price.

Stock Impact

Deepening regional footprint and continued expansion.

• In 2019, Jumbo Group opened new outlets regionally through JV and franchising. These included three franchise Ng Ah Sio Bak Kut Teh (NASBKT) restaurants in Taiwan. It also expanded into South Korea with two new franchise Jumbo Seafood restaurants. Contributions from these franchises come in two forms – franchise income and share of associates given it is a JV.
• Although franchise income helps improve margins, an S$0.8m loss was recorded under share of associates in FY19. We understand this was mainly due to the gestation period of a new outlet in South Korea.
• Plans are also underway to introduce the NASBKT brand to China as well as add more NASBKT outlets in Taiwan. Jumbo Group also plans to add new franchised Jumbo Seafood restaurants in Thailand, Vietnam and China in the next 12 months.

Singapore operations maintain strong foothold.

• Management shared that the performance for both the newly opened Jumbo Seafood outlets at Jewel Changi Airport (Apr 19) and ION Orchard (Dec 18) remains strong. Management also noted that the 4-week renovations at the Jumbo Seafood Gallery outlet in 3QFY19 led to an estimated loss of revenue of S$1.2m and was also a drag on margins due to fixed overhead costs.
• We believe growth for next year will be mainly driven by the Singapore Jumbo Seafood operations, backed by full-year contributions from new Jumbo Seafood outlets and normalised earnings from the Riverwalk outlet which should improve margins. In addition, the Zui Yu Xuan Teochew restaurant is likely to break even next year.
• As for China operations, we understand Jumbo Group is committed to improving earnings through better branding and potentially new concepts; however we remain conservative on its prospects.

Earnings Revision / Risk

• We trim our net profit estimates for FY20-22 to S$13.9m (-4.1%), S$15.1m (-2.6%) and S$15.8m (-2.1%) respectively as we factor in lower share of profit from associates. We also revise revenue downwards slightly.
• Risks include a slowdown in sales in China and poor reception of new outlets.

Valuation / Recommendation

• Upgrade to BUY with a higher target price of S$0.44 (previously S$0.37), pegged to peers' average 2020F PE of 20.3x as we roll valuation to 2020.
• Jumbo Group is currently trading at 17.3x FY20F PE, a discount of 15% to peers’ average and 1SD below its mean PE.

Share Price Catalyst

• Stronger-than-expected performance from new outlets and higher-than-expected store openings.

Source: UOB Kay Hian Research - 28 Nov 2019