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Invest in Jumbo Group?

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2017 is a milestone year for Jumbo Group as the F&B outfit celebrates its 30th anniversary. Listed in SGX Catalist only in 2015, Jumbo counts sovereign wealth fund, Temasek Holdings and Osim founder, Ron Sim, among its major shareholders. Temasek Holdings has a stake of 6.2% (40 million shares) while Ron Sim holds 5% (32.1 million shares). With such strong support from institutional investors, is Jumbo Group a safe bet for retail investors and is it worth the effort to invest in this counter?

Share performance

In my last article in December 2016, I wrote that the share price was on bullish form. Indeed, there was a minor bull run which saw Jumbo share price surging to a peak of $0.78 in February 2017. Subsequently, the shares went on a correction mode and tumbled to a low of $0.54. It was only in recent weeks that the share price recovered to $0.60 level.

Despite its share performance, I like the growth story of Jumbo Group. The revenue had been growing consistently from $87.6 million in FY2012 to $136 million in FY2016, demonstrating management’s track record in growing the company. For the 9 months ending in FY2017, the revenue amounted to $106 million. Based on projection, it is likely that total revenue for FY2017 would surpass the previous years. Similarly, profit before tax had been rising from $8.8 million in FY2012 to $18.4 million in FY2016. Profit for FY2017 is also likely to exceed FY2016, barring unforeseen circumstances.

Business model

The main thing I like about Jumbo Group is that the business model is simple and can be scalable. Basically, as a multi-concept dining food and beverage company, the Group’s network of F&B outlets (including those of its associated companies and those under licensing arrangements) spans Singapore, the PRC, Japan and Vietnam. Jumbo also provides catering services for customers in Singapore, and sells packaged sauces and spice mixes for some of its signature dishes in its outlets, selected stores, supermarkets, travel agencies and online via the JUMBO eShop.

Jumbo Group

The recent opening of the first Jumbo Seafood outlet in Beijing was part of its plan to expand in China using the proceeds from the IPO. The new restaurant will be the Group’s fourth Jumbo Seafood in China (it already has three restaurants in Shanghai). Besides China, Jumbo Group has 15 restaurants in Singapore, one joint-venture restaurant in Japan and 1 franchise outlet in Vietnam. With staff strength of about 1000, Jumbo Group sells more than 1.7 tonnes of crabs each day and serves more than 7,500 diners each day.

Revenue sources

The decision to diversify revenue sources from different countries and different businesses (catering and franchises) is needed because of the risks of its core business. The anchor product is ultimately still the Chili Crab dish but the seafood business is susceptible to economic conditions. When times are bad, Singaporeans are less likely to dine out, much less spending on premium food like Chili Crab. In addition, the business is also subjected to the price fluctuations of the raw ingredients, such as the crabs which are imported from overseas.

Henceforth, the penetration into the China market is important because the business expansion would help to support the business growth. Indeed, Jumbo Group is in a sweet spot because the Chinese loves seafood and the growth potential is immense in view of the huge population size and purchasing power of the middle class. It is likely that the management is using the four restaurants in China to gain operational knowledge, such as the consumer taste preferences and culture. In time, it is likely to leverage on the operational experience and expand aggressively into other high-growth cities in China.

The strategic direction for Jumbo Group is to embark on acquisitions and joint ventures to create bigger economies of scale. According to the Q3 financial data, the F&B outlet still derives 83% of its revenue from Singapore and 17% from China. In terms of brand, Jumbo Seafood continues to dominate the revenue source, making up 78% of the total revenue in Q3. Thus, it would make sense for Jumbo Group to continue its acquisition and joint venture projects in Singapore because the company is able to extract synergies and economy of scale. For FY2017, operations in China have continued to grow positively with increased revenue contribution from 8.5% in FY2015 to 14.6% in FY2016.

Financial performance

Cash generated from operations for 9 months ending in FY2017 was $7.4 million, a decrease from last year’s $11.5 million. The free cash flow was estimated to be $3.4 million. The free fall of the share price throughout this year could be because of the drastic decrease in the cash flow. With a low free cash flow, growth plan would be severely limited and there is no choice but to dip into the cash holdings, which has decreased from $54 million to $48 million.

Despite the modest free cash flow, the balance sheet remained healthy. There are no debts and current liabilities amounted to $13 million only. With current assets of $58 million, Jumbo Group is cruising along fine. Although the food industry is competitive, gross profit margin remained fairly stable at 62.9% in Q3 FY2016 and 62.7% in Q3 FY2017.

Jumbo is currently trading at about $0.60 per share. Price/Book Value is 6.219 and P/E ratio is 24.2. At this level, valuation for the shares seems a bit high. Under the current climate, there is downside risk for investors to enter at this price because the target customers are middle to high income earners. Thus, its business is very much sensitive to economic conditions.

Nevertheless, I continue to like Jumbo Group because the management is growing the business prudently. Return on Equity (ROE) was double digits for the past five years, between 22% to 30%. Henceforth, I would classify Jumbo Group as a young company with moderate growth.

There is potential for the business to grow much bigger through acquisitions but I reckon the management is more focused in growing brand loyalty. In fact, membership numbers for the JUMBO Rewards programme had grown from 48,000 members last year at the time of IPO, to 54,000 members today.

Conclusion

With an IPO price of $0.248 in November 2015, the share price of Jumbo Group went on a bull run but is now languishing at $0.60 level. For retail investors, a return of 140% within two years is indeed a good investment.

But I am also wary of the big boys’ movements in this counter. According to media reports, Temasek Holdings and Ron Sim had invested $10 million and $8 million in Jumbo Group during the IPO offering. At current stock valuation, both players are now sitting on huge paper gains. However, as venture capitalists, the investment objective is always to exit after the targeted returns have been reached.

Thus, it is unknown when Temasek Holdings or Ron Sim would offload their stakes.

Not vested in this counter but would continue to monitor and provide further updates and analysis. Enjoy the ride.

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