Restaurant operator Jumbo Group has clawed out of the red, say CGS-CIMB Research analysts Kenneth Tan and Ong Khang Chuen. The company can expect a “significant return to profitability” in the coming year, with an earnings rebound set for FY2023, they add.
In a Dec 13 note, Tan and Ong upgraded Jumbo to “add” from “hold” with a higher target price of 35 cents, up from 30 cents previously. The new target price represents an upside of 20.7% against a traded price of 29 cents.
Following Jumbo’s return to profitability in 2HFY2022 ended September with net profit of $4.4 million, the analysts expect FY2023 net profit to record a significant rebound to $8.6 million, up from a net loss of $0.1 million for FY2022.
Key positives from 2HFY2022 financials include a strong rebound in Singapore revenue as outlet footfall gained traction, and an exceptionally strong gross profit margin (GPM) of 66.3%, compared to 2HFY2021 GPM of 61.9%.
Meanwhile, FY2022 revenue from China fell 12% y-o-y to $28 million on the back of stringent Covid-19 measures imposed in the region, write Tan and Ong. No dividends were proposed for the financial year.
Jumbo has a portfolio of 10 food and beverage (F&B) brands and has 46 F&B outlets (including those of its associated companies and those under licensing arrangements) in 13 cities in Asia: Singapore, Shanghai, Beijing, Xi’an, Fuzhou, Xiamen, Seoul, Taipei, Ho Chi Minh City, Hanoi, Bangkok, Tokyo and Osaka.
See also: Jumbo back in the black for 2HFY2022
Singapore operations set for a stronger recovery
According to Tan and Ong, Jumbo’s management shared that revenue and footfall of some of its Singapore outlets were close to pre-Covid-19 levels in 4QFY2022. “We expect FY2023 Singapore revenue to ramp-up further from a gradual return of North Asian tourists as the region reopens further, easing Covid-19 restrictions and higher contribution from new outlets opened in FY2022.”
While Tan and Ong see the possibility of further downtrading as consumers exercise financial prudence, they believe the impact should be cushioned by the return of tourists and resilient restaurant spend from upper-middle-income consumers.
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China operations likely to improve
With China announcing nationwide relaxation of Covid -19 restrictions on Dec 7, Tan and Ong believe Jumbo’s China operations are set for a steady recovery in FY2023, as restaurant footfall improves.
Easing domestic restrictions and potential resumption of domestic travel could further drive up revenue contribution from the Universal Beijing Resort outlet, as the outlet only commenced operations in September 2021 and was thereafter adversely impacted by sporadic lockdowns throughout FY2022, they add.
That said, Tan and Ong have lowered their earnings per share (EPS) estimates by 3%-5% as they “fine-tune estimates post-2HFY2022 results”. “We believe Jumbo appears set for a steady recovery in FY2023. At current levels, Jumbo trades at 16.2x 2024 P/E, approximately 2.2 standard deviations below its three-year historical mean.”
Re-rating catalysts include a quicker reopening of North Asia and easing of domestic restrictions in China, while downside risks include prolonged Covid-19 restrictions in China and rising cost pressures that could erode margins.
As at 10.13am, shares in Jumbo are trading flat at 29.5 cents.
