Not only is Singapore a thriving business hub for foreign investors, it is also a tourist hotspot for foodies. Many travellers come to the Lion City to indulge in some iconic national dishes while taking in the city lights of Singapore. If travellers are looking for the must-try local delicacies when coming to Singapore, it is hard to look past a piping hot pot of chili crab.

This led us to take a look at JUMBO Group (JUMBO), a home-grown seafood and crab specialist that has gained prominence through its signature chili crab, and has grown into a household name in the region. The Catalist-listed seafood darling delivered a mixed earnings performance in the latest quarter. We dive deeper to see if JUMBO could rekindle better performances in the coming quarters?

JUMBO Earnings No More?

In the last five years, revenue rose at a compounded annual growth rate (CAGR) of eight percent, from $112.4 million in FY14 to $153 million in FY18. Gross profit also grew 8.1 percent from $70.4 million to $96 million in the same period. Meanwhile, JUMBO also consistently operated with a respectable gross profit margin in the mid-60 percent range. However, net profit contracted at a compounded rate of 1.1 percent to $11 million during the same period.

In the latest earnings release, JUMBO’s 1H19 revenue fell 1.4 percent to $76.7 million mainly attributed to softer performance from China operations, partially offset by higher sales from Singapore operations and franchises. Gross profit increased by a marginal 0.1 percent to $49.2 million due to higher franchise income. Meanwhile, gross margin improved from 63.2 percent to 64.2 percent with the closure of underperforming outlets in Singapore.

Expenses wise, employee benefits and operating lease expenses reduced 2.3 percent and 5.4 percent to $23.7 million and $6.8 million respectively with the closure of underperforming outlets. On the other hand, utilities and depreciation expenses increased 6.1 percent and 17.3 percent to $1.9 million and $2.6 million respectively as a result of newly opened JUMBO Seafood restaurants in Xi’an, China and Singapore.

Ultimately, net profit jumped 17 percent to $7.4 million. The net profit margin also improved from 8.2 percent to 9.7 percent.

Strong Balance Sheet

As at 31 March 2019, JUMBO sustained a sound financial position with a cash balance of $46 million and zero borrowings. Its strong cash position and the absence of debt highlight its prudent balance sheet management and financial flexibility to provide a good war chest for expansion.

Notwithstanding that, the group has also been producing rather healthy cash generation and has continued to fund expansion through internal resources. In 1H19, JUMBO saw stronger cash generation with operating cash flow coming in at $7.2 million and a 4.2 percent decrease in capital expenditure to $3.1 million. This translates to a free cash flow of $4.1 million, compared to a lower free cash flow of $1.8 million considering it spent $3.2 million in capital expenditure in 1H18.

Diversifying Brands Portfolio

In the past two years, JUMBO closed down two of its Ng Ah Sio Bak Kut Teh outlets, two Jpot outlets and the worst performing JUMBO Seafood outlet in Singapore at National Service Resort & Country Club (NSRCC).

This year, the Group opened two JUMBO Seafood restaurants in Singapore at Ion Orchard and Changi Airport Jewel. Despite the two newly-opened outlets being smaller, the higher tourist traffic flow and JUMBO’s strong brand equity would allow the group to easily tap into arriving tourists and turn profitable. Meanwhile, the group’s first Jumbo Seafood franchise restaurant in South Korea is expected to begin operations in 3Q19.

Besides, JUMBO launched two new dining concepts – Zui Yu Xuan and Chao Ting to offer authentic Teochew Cuisine at Far East Square in Singapore. Also, JUMBO has been focusing on diversifying its brand portfolio and customer base with a smaller ticket size brands including Ng Ah Sio Bak Kut Teh in China and Taiwan as well as two more Tsui Wah outlets in Singapore.

Going forward, we expect earnings growth to be driven by new store openings. Other than that, we also expect some margin expansion from the closure of underperforming stores and opening of higher-end and higher-footfall restaurant outlets as well as higher franchise income following a slew of franchise outlets established in FY18.

Valuations

jumbo chart(As at 15 July 2019)

Based on the trailing twelve months (TTM) earnings-per-share of about $0.019 and closing price of $0.395, shares of JUMBO are changing hands at TTM price-to-earnings (P/E) of 20.9 times. Stripping away net cash from its share price, P/E excluding cash would be only at 17.1 times. Relative to its local-listed peers, JUMBO may not be overpriced considering it has outperformed the others by most measures.

Looking at the whole picture, JUMBO definitely holds the potential for further growth. However, after a spectacular run in the past year, it might be wiser to take a breather when revenue from the group’s franchising and joint venture deals has yet to flow.

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