SINGAPORE (Feb 13): UOB Kay Hian has downgraded seafood restaurant chain Jumbo Group to “hold” from “buy” previously, and slashed its target price by 27% to 32 cents.
Jumbo’s earnings are expected to be hit hard by the outbreak of the novel coronavirus CoVid-19, due to slowdown in the number of tourists to Singapore, as well as the shutdown of restaurants and retail outlets in China.
Including joint ventures and franchises, Jumbo has nine outlets in mainland China, which contributed to 18% of total revenue for FY2019 ended September 2019.
“While Jumbo has no outlets in Wuhan, we understand that some of its outlets in China have been instructed to be closed by the local authorities or shopping malls that house the outlets,” says lead analyst Joohijit Kaur in a Feb 13 report.
Kaur also notes that Jumbo’s China outlets were loss-making in FY2019 due to some unprofitable outlets.
Meanwhile, Jumbo can also be expected to face a challenging business environment in Singapore, where the number of confirmed cases of the coronavirus hit 50 as of Feb 12.
Outside of China, Singapore is the country with the highest number of coronavirus patients.
The Singapore Tourism Board (STB) warned Tuesday that the city state’s tourist arrivals and receipts for 2020 will take a significant hit, with visitor arrivals estimated to drop by 25-30% this year.
See: Visitor arrivals to Singapore expected to drop as much as 30% due to coronavirus outbreak
“We reckon that Jumbo’s operations in Singapore, particular its Jumbo Seafood restaurant that is well known among tourists, would see a drop in sales as tourist arrivals in Singapore decline,” Kaur says.
Notably, Jumbo’s outlet at Jewel Changi Airport is likely to suffer weaker footfall as flight arrivals to the country decline.
Already, a number of countries have advised their citizens to avoid unnecessary travel to Singapore because of the spread of the coronavirus.
“[Jumbo’s] other outlets may also see a smaller business dining and group gathering crowd (for business meetings and social gatherings) as companies limit corporate events and locals avoid dining out in fear of contracting the virus,” Kaur says.
“The timing of the outbreak comes at an unfortunate time for Jumbo as the first quarter of the year (Jumbo’s fiscal second quarter) is typically a seasonally stronger quarter for the group where the outlets experience higher business volume due to the Chinese New Year,” she adds.
The analyst estimates that Jumbo’s net profits will fall by 29.2% to $9.8 million in FY2020. The earnings slowdown is expected to continue into FY2021 and FY2022, with earnings expected to come in 11.9% and 10.7% lower, respectively.
UOB’s target price for Jumbo is pegged to its peers’ average FY2020F price-to-earnings (PE) of 21 times.
As at 2.05pm, shares in Jumbo are trading half a cent down, or 1.5% lower, at 33 cents. This implies an estimated PE of 21.9 times, a price-to-book (P/B) of 3.0 times, and a dividend yield of 3.6% for FY2020F.
