• Jumbo Group's earnings to slump on severe deterioration and impact from COVID-19.
• Restrictions on tourists will affect Singapore operations while China losses are expected to widen.
• Slash FY20-21F earnings by 31-58%.

Exposed to Slower Tourist Arrivals and Social Distancing

Vulnerable to COVID-19:

• We see Jumbo Group (SGX:42R) as the most exposed of all F&B plays in Singapore to COVID-19. While Jumbo Group's share price has taken a severe beating, we believe it could take time for operations to normalise.
• We estimate that more than half of Jumbo Seafood Singapore’s customers are tourists and with restriction on short term visitors to Singapore, this would have a deep implication on its operations.
• Secondly with social distancing encouraged, discretionary trips to restaurants are expected to reduce in both Singapore and China. These will put pressure on earnings going forward.

Social distancing to hit restaurant sales:

• Social distancing is now encouraged and that should lead to reduced dining at restaurants as well. During SARS in 2003, restaurant sales suffered the most across all foodservice formats. We see shifts in food consumption into supermarkets, and other format outlets and away from restaurant dining during this period, on the back of reduced visits by tourists and locals.
• Jumbo Seafood and its Teochew restaurants in Singapore contributed close to three quarters of revenue in FY19.

Jumbo Seafood’s China outlets are restaurants as well:

• Contribution close to 20% of sales, Jumbo Group’s key revenue contributing outlets are the five Jumbo Seafood restaurants in Beijing Xian and Shanghai, all of which are restaurants. We expect revenue to be affected in China during this period of social isolation.
• China was loss making in FY18-19 as it has expanded its footprint there. We now expect China losses to be more severe, led by lower sales with the worsening of the COVID-19 outbreak across the world.

Recovery to take longer than expected, cut FY20-21F earnings by 31-58% on lower topline, operating deleverage:

• We anticipate a lower footfall in view of the wide-spread impact of COVID-19 situation. We now expect a recovery to take place further into the future, leading us to reduce our FY20F revenue forecast to S$110m, representing an 28% y-o-y decline from lower footfall and store rationalisation.
• We factor lower gross margins to account for higher food prices during this period. Most operating costs remain relatively fixed and this reduces our FY20F operating margin further to 5.0%. This includes widening FY20F operating losses from China.

Downgrade to HOLD With Lower S$0.18 Target Price

• Although Jumbo Group now trades at -2SD of its historical mean PE, we believe upside is capped by a longer-than-expected earnings recovery led by the worsening of the COVID-19 outbreak in recent weeks. We factor in lower dividend payout ratio as we believe it will be prudent to conserve cash during this challenging period.
• Our Target Price is now lowered to S$0.18, pegged to 18x (from 23x previously to reflect a less robust outlook) blended FY20-21F PE or near -1.5SD of its mean PE.
• Our recommendation is downgraded to HOLD until we see signs of an earnings recovery being in place.
• We believe Jumbo Group's share price could lag the market if and when the current pandemic blows over. That said, its strong balance sheet and cash position (7 Scts per share as of Sep 19 or 38% of market cap) should see the Group weather through this storm

Source: DBS Research - 25 Mar 2020