• Jumbo Group's FY2019 net profit (+5.9% y-o-y) was in line with expectations at 97% of our and 98% of Bloomberg consensus forecasts.
• We expect FY20F to be a year of margin expansion, with stronger profit contributions from its Singapore outlets offsetting the weakness in China. Jumbo Group is actively expanding its overseas footprint via JV and franchising.
• Maintain ADD and Target Price of S$0.47.

4QFY19 in Line With Expectations

• JUMBO GROUP (SGX:42R)'s 4QFY19 revenue rose to S$40.6m (+11.5% q-o-q, +2.0% y-o-y), driven by
  1. resumption of operations at its Jumbo Seafood outlet in Riverwalk, and
  2. new store openings in Singapore.
• See Jumbo Group Announcements; Jumbo Group Latest News.
• Buoyed by stronger operating leverage with positive SSSG in Singapore, Jumbo Group’s OPM expanded 1.6% pt y-o-y to 10.8% in 4QFY19. Overall, it recorded a net profit of S$2.6m (+54.3% q-o-q, +4.6% y-o-y) for 4QFY19.

Singapore Operations the Key Earnings Growth Driver in FY20F

• We expect Jumbo Group’s Singapore operations to be its main earnings driver in FY20F, post the closure of lower-margin stores and the opening of higher-end higher-footfall outlets.
• Its two Jumbo Seafood stores that commenced operations in FY19 (Ion Orchard and Jewel Changi) saw strong sales ramp-up. They should contribute positively to its bottomline in FY20F, in our view. We forecast Jumbo Group’s Singapore stores to record 2% SSSG in FY20F, helped by continued tourist arrival growth (especially from North Asia).

China Operations to be Less of a Drag in FY20F

• According to management, Jumbo Group’s China operations saw losses narrow slightly on a q-o-q basis in 4QFY19.
• Jumbo Group is actively optimising the cost structure of its China operations. In Oct, a store in Raffles City Shanghai was converted into Jumbo Kitchen (casual dining format with lower average spend per head of Rmb150-200) to cater to a wider audience.
• We believe losses from its China operations peaked in FY19, and will be less of a drag ahead. We forecast Jumbo Group to report 20.4% net profit growth in FY20F.

Expanding Overseas Footprint Through JV and Franchising Model

• In FY19, Jumbo Group added four Jumbo Seafood franchise outlets (in Bangkok, Fuzhou and South Korea), and three Bak Kut Teh franchise stores in Taiwan. As at end-Oct 2019, it has a total of 11 franchised stores.
• We expect Jumbo Group to add 5-6 franchise outlets per year, and franchise income to contribute 1.1% to its revenue in FY20F.

Maintain ADD and Target Price of S$0.47

• Maintain ADD. We trim our FY20/21F EPS forecasts by 4.5%/3.3% as we lower our China revenue assumptions. Our Target Price is kept at S$0.47 as we roll forward our valuation to end-CY21F, still based on 20.4x P/E (0.75 s.d. below its historical 5-year average P/E). See Jumbo Group Share Price; Jumbo Group Target Price.
• Potential re-rating catalysts include faster-than-expected ramp up of new stores.
• Downside risk include slower-than-expected turnaround of its China operations.

Source: CGS-CIMB Research - 26 Nov 2019