In anticipation of a Chinese-driven decline in revenue, CGS-CIMB Research analysts Kenneth Tan and Ong Khang Chuen have kept their “add” call on Jumbo Group 42R at a reduced target price of 36 cents from 40 cents previously.
The analysts’ target price is based on a 14x 2025 price-to-earnings ratio (P/E), which is in line with regional peers. This is down from a previous target price multiple of 20x P/E.
In their Jan 12 report, Tan and Ong note that after a strong performance in FY2023 ended Sept 30, they forecast the group’s 9HFY2024 ended June Singapore same-store sales to rise 7% y-o-y, on the back of stronger demand from families and businesses, tourist-driven footfall and price hikes for selected items.
According to the group, domestic footfall as of end-FY2023 had exceeded pre-Covid-19 levels, with all six Jumbo Seafood outlets remaining profitable.
The analysts write: “We see room for tourism spend, which historically formed around 33% of Jumbo’s Singapore revenue to improve in FY2024, as inbound North Asia tourist volumes ramp-up throughout the year.”
Despite the expected footfall of tourists from North Asia or more specifically, China, Tan and Ong warn of “ongoing softness” in China’s domestic economy. Thus, Jumbo Group’s business in the country may only start to “meaningfully recover” from 2HFY2024 as consumers and corporates turn more budget-conscious in the near-term.
The group will also be closing one of its Jumbo Seafood outlets in Xi’an, China, which the analysts understand should have a “minor impact” to group level revenue at around $0.5 million per annum, as the outlet is one of Jumbo’s smallest in China.
Meanwhile, Tan and Ong note that the Universal Beijing Resort outlet, which opened in 2021, is still in “gestation mode” given tough Covid-19 policies and a lack of tourist footfall.
They write: “In our view, it will likely need another year to ramp-up to optimal scale. We now expect China revenue to decline 2% y-o-y in FY2024, before returning to growth in FY2025.”
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Overall, the analysts expect Jumbo to sustain its elevated operating profit margin (OPM) of around 11% from FY2024 to FY2025, as benefits from optimisation of its supply chain such as increasing direct imports into Singapore offsets higher labour costs.
Correspondingly, Tan and Ong raise their FY2024 to FY2025 earnings per share (EPS) estimates by 15%-16%, attributing it to the stronger Singapore and weaker Chinese revenue growth and higher OPM assumptions on strong cost controls. The analysts’ new EPS forecasts for FY2024 and FY2025 are 2.4 cents and 2.5 cents respectively.
According to Tan and Ong, re-rating catalysts include the quicker ramp-up in tourist footfall and improving domestic consumption in China, spurring greater restaurant spend.
Conversely, downside risks include the prolonged consumption weakness in China, outlet closures, and recessionary fears spurring consumer downtrading behaviour.
As at 11.45 am, shares in Jumbo Group are trading flat at 28.5 cents.
