SINGAPORE (Nov 27): DBS Group Research is maintaining its “hold” call on restaurant operator Jumbo Group with a lower target price of 61 cents, based on 23 times FY18 earnings pegged to the group's historical average.
In a Monday report, lead analyst Alfie Yeo says he remains positive on the group’s outlook given its regional store expansion activities.
However, he also points out that the resultant expansion-related costs have led to higher operating expenses and lower operating margins as reflected over FY17, with continuing expansion initiatives likely to continue adding to cost and margin pressures in the near-term.
See: Jumbo's FY17 earnings fall 6.7% to $14.5 mil
This has resulted in below-consensus earnings forecasts on expectations of a higher operating cost structure ahead, led by rents and depreciation. Yeo hence believes growth expectations are priced in, and that the group is currently trading in line with its regional peers at 21.9 times FY18F.
“Faster-than-expected outlet expansion, especially in China and regional franchises, are potential stock catalysts provided cost structure does not deteriorate considerably. More franchise outlets will also deliver better margins and growth once the number of outlets attain critical mass,” says Yeo.
Meanwhile, Lim & Tan Securities says Jumbo’s current valuation appears fair at 19 and 17 times FY18 and FY19 P/E, respectively, Hence, the house is staying “neutral” on the stock while noting it is supported by a decent yield of 2.9%.
Lim & Tan's research team, too, observes higher operating expenses due to the group’s new outlets as well as outlet expansion and new corporate offices in Singapore and China over FY17, with a slightly increase in operating expenses due to Jumbo’s recent 30th anniversary celebrations this year.
In the house’s view, Jumbo’s intention to focus on cost rationalisation and improving work flow processes, manpower utilisation and IT applications is “especially pertinent” in light of reduced government grants such as the wage credit scheme and productivity & innovation credit scheme.
“At the same time, Jumbo is actively looking for suitable business opportunities to expand its network of F&B outlets and business. We understand that it is currently exploring franchising opportunities to diversify and grow its business offerings outside of Singapore and China,” says Lim & Tan.
As at 12.10pm, shares in Jumbo are trading 1 cent lower at 56 cents.
