Jumbo Group Limited Initiation Report
Jumbo Group Limited (‘Jumbo’) is one of the leading Food and Beverage (‘F&B’) companies in Singapore. It was founded in 1987 by Mr Ang Kiam Meng, current CEO of the company, when he started the first Jumbo Seafood restaurant at East Coast Seafood Centre. Well-known for its chili crabs, Jumbo gradually expanded from its first restaurant to having 36 restaurants of various brands under its portfolio today. On November 2015, Jumbo Group listed on the Singapore Exchange Securities Trading Limited Catalist Board with ticker code: SGX:42R. It IPO-ed at a share price of $0.25. As at 1 Dec 2019, it has a market capitalisation of SGD$237 million.
Business Model of Jumbo Group Limited
Jumbo Group’s multi-dining food concepts include (i) restaurants owned and operated by Jumbo, (ii) restaurants operated by franchisees and (iii) restaurants operated by joint ventures and associates.
A) Owned and Operated
Restaurants owned and operated by Jumbo drives a significant part of revenue, with their bottom line having a direct impact on the group’s financial performance. In particular, Jumbo Seafood Singapore is the group’s single largest earnings driver, contributing 60% of revenue in FY2018. As chili crab is an iconic national dish, Jumbo Seafood faces plenty of competition. However, Jumbo Seafood’s strong brand equity in Singapore enables it to be a dining destination for consumers- i.e. diners pre-plan their trips to Jumbo rather than dine on impulse. For instance, Jumbo Seafood is one of the preferred restaurants amongst Chinese for celebratory occasions such as Chinese New Year, Mother’s Day, Father’s Day and birthdays.
Jumbo franchised out its Jumbo Seafood and Ng Ah Sio Bak Kut Teh brands. For every franchisee’s outlet opened, Jumbo earns a one-off outlet opening fee as well as recurring monthly royalty fee and sales of sauces and pastes from the Group to the franchisees. That’s right, Jumbo so fiercely guards its chili crab recipe such that it produces the chili crab paste in its central kitchen before exporting it overseas to its franchisees. That central kitchen in Kaki Bukit, Singapore helps Jumbo to maintain food consistency and improves productivity. That building also serves at its corporate headquarters.
The Ng Ah Sio Bak Kut Teh brand resonates well with Taiwanese, particularly with news of celebrities and even her ex-President Ma Ying Jeou making dining pit-stops there whenever they are in Singapore. This franchisee has gone from strength to strength- operating 4 outlets today since the first one opened in July 2018 in Taiwan.
C) Joint Venture/Associates
In March 2018, Jumbo entered into a Joint-Venture with Tsui Wah Holdings to bring the famous Hong Kong Cha Chaan Teng concept to Singapore. The first outlet opened in Clarke Quay in Jun 2018 and the second outlet opened in downtown Orchard (Robinsons The Heeren) in Sep 2019. While Tsui Wah is certainly a household brand in Hong Kong, do note that the first outlet is still loss-making as at 2Q2019 although it is EBIDTA positive.
It has another brand Singapore Seafood Republic with outlets in both Japan and Singapore in this segment.
Investment Merits of Jumbo Group
1. Jumbo Seafood Singapore To Grow
Despite a record number of tourist arrivals in 2018 for Singapore, 2019 looks on track to beat it as shown in Diagram 2.
As at Sep 2019, international tourist arrivals already increased 2.1% YTD. Generally, any increase in tourism in Singapore should benefit the F&B Industry through a trickle-down effect. Perhaps more so for Jumbo since most of its outlets are well-located at tourist hotspots such as Riverside Point, The Riverwalk, Dempsey Hill, Ion Orchard and Jewel Changi Airport. In addition, its Riverwalk outlet also completed its renovations in the second quarter and should see stronger contributions.
Jumbo’s outlets in Ion Orchard and Jewel Changi Airport only opened in December 2018 and April 2019 respectively and should be able to contribute to the bottom line since management revealed that a new Jumbo Seafood outlet typically breaks even in 6 months.
Therefore, Heartland Boy is expecting Singapore operations to carry the heavy lifting in the next couple of quarters, buoyed by (i) same store sales growth from larger influx of tourists as well as (ii) new outlet openings.
2.Expansion Overseas Via Franchises
Heartland Boy likes the franchise business model as it allows Jumbo to scale quickly in a non-capital- intensive manner. In recent years, its franchisees in various countries have taken the Jumbo Seafood brand to Taiwan, Korea, Vietnam and Thailand. These markets are significantly larger than Singapore and have the potential to propel the next leg of growth if executed well.
Besides the Jumbo Seafood brand, it has also franchised the Ng Ah Sio Bak Kut Teh brand to a Taiwanese franchisee. Once these outlets stabilised, they should start contributing to Jumbo’s revenue via franchise fees.
Altogether, Jumbo targets to add 5-6 franchise outlets each year and targets Shenzhen, other Chinese cities, Korea, Hong Kong, Macau and Indonesia for future expansion.
3. Strong Revenue Growth, Above-average ROE, Decent Dividend Yield
Ever since its listing, Jumbo has experienced revenue growth every year. Unfortunately, the same cannot be said for its earnings which has been on a gradual decline, partly affected by weakened operating performances from China.
Its ROE ranges from 16% to 23% over the recent years and is above industry’s average. More importantly, it clears Heartland Boy’s hurdle rate of 12% for ROE as shown in Diagram 3.
Jumbo Group has a very high cash generative business model with strong free cash flow. Its cash conversion cycle is also negative, meaning that it receives payment from its customers much faster than it needs to pay its suppliers. Strong operating cashflow allows it to distribute dividends to reward the shareholders. It last issued 12 cents of dividends, which translates to a decent dividend yield of 3.2% at stock price of $0.37.
Investment Risks of Jumbo Group
1. China Economic Slowdown
Jumbo’s operations in China continue to face challenges. As recent as 4Q19, it experienced same store sales decline which affected Jumbo’s bottom line. This was mainly attributed to weaker consumer spending as a result of a slowdown in China’s economy. Its operations in China is another key indicator to watch as this segment contributes to 20% of Jumbo’s revenue. Overall, China’s operations it is still loss-making, despite having commenced operations in the country since 2013.
In addition, RMB has also been depreciating as a result of US-China trade war. A depreciating Yuan would raise import prices of mud crabs and potentially lower profit margins of Jumbo.
2. Manpower Costs
Like any F&B group in Singapore, manpower costs are a key risk to Jumbo as it relies extensively on foreign manpower to supplement its labour force. It is well-known that Singaporeans tend to shun the F&B industry as it is labour intensive. Approximately one-third of Jumbo’s expense is attributed to manpower costs, just behind Cost of Goods Sold (ingredient costs).
Unfortunately, with effect from 1 Jan 2020, Singapore government is lowering the foreign workers dependency ratio ceiling to 38% from the current 40% and the S-Pass Sub-DRC to 13% from 15% in the service sector. These would be further tightened in 2021 to 35% and 10% respectively. Jumbo would be forced to increase its productivity to meet this new regulation. If it is unable to do so, it would have to offer a higher salary to a local Singaporean to replace the foreign labour, which would compress profit margin further.
Review of Jumbo Group Limited
Jumbo Group is a household name in Singapore that most can resonate with. It counts Osim founder Ron Sim and Temasek as its shareholders as stated in its prospectus. It has a good growth story going with its expansion overseas via franchises. If executed well, shareholders should be able to reap the benefits.
Vested at an average price of 0.37 cents since Nov 2019. He has a price target of $0.44. He will continue to share his thoughts of Jumbo Group on forums such as InvestingNote.
This article was published on 1 Dec 2019.