Wednesday, 11 October 2017

Is This Stock Delicious Enough for Your Investment?

I recently got interested in Jumbo Group mainly due to its falling share price. I visited Jumbo Seafood Restaurant and JPot during festive season and family birthday celebrations. The food quality is good and ambience is friendly. Coincidentally, a relative’s wedding lunch was held in Chui Huay Lim Teachew restaurant, and I found the food really tasty.

Operations overview
Jumbo Group is a multi-concept F&B company with 16 restaurants in Singapore, 3 outlets in Shanghai, and 3 other joint venture/franchised outlets in Singapore, Japan and Vietnam, under 5 restaurant brands. It serves more than 1.6 tonnes of crab per day to more than 7,000 diners. 

(Assuming a conservative $90 per kg of crab, it generates $144k of sales per day, and $52m per year just from crab alone)

Financials overview



Jumbo's revenue has shown a nice increasing trend over past 3 years. This is not surprising given that they had been on an expansion mode since listing. 

EBITDA margin has been hovering between around the mid-teen percent. Likewise, its profit before tax has also increase from $15m to $18m a year. 

Its revenue, EBITDA and PBT have been increasing in tandem for the past 3 years: 21%, 17% and 18%. Likewise for Net Ops Cashflow, an increase at a similar level of +21% from FY14 to FY16. 

It seems that while Jumbo has been expanding overseas into China , it is doing so at a measured pace and has been managing its cost quite well, with growth in topline flowing down to its EBITDA,  earnings and cashflow.

I include FY17 figures up till Q3 here for ease of comparison:
  • Revenue, EBITDA, PBT: $106,902,000, $17,595,000, $14,191,000
  • Net Ops Cashflow and Free Cashflow: $7,423,000, $3,440,000
If we annualise the above Q3 figures, revenue, EBITDA and PBT would still beat last year's numbers although by a smaller margin. Does it mean that Jumbo's growth is beginning to plateau? Perhaps that was market's interpretation which explains the drop in price past few months.

Expansion Drive into China
From the initial one restaurant in Shanghai before IPO, Jumbo has expanded its footprint in China by adding 2 more outlets in Shanghai, and 1 in Beijing that just opened in Jul. China's share of total revenue has grown from 5.8% in FY14 to 17% in H1 FY17. 

Management is cognizant of fact that Singapore market is small and saturated, and the only way to grow is to go overseas. This has been their strategic direction since day 1. 

And the strategy to target the higher end segment of F&B, providing premium quality seafood to the affluent consumers in first tier cities at selected locations in upscale luxury malls, such as IFC in Shanghai Pudong and IAPM mall in Xu Hui District, and SKP in Beijing (Orchard Road, Marina Bay or CBD equivalent of both cities) have been executed well so far. It is done at a comfortable pace of 3 restaurant in 3 years, and more importantly without incurring a lot of debts. Business growth is reflected in the growing revenue, EBITDA, profits and operating cash flow. This is healthy expansion. 

And there is still a big balance of IPO proceeds for further expansion, as seen in Q3 report. Coupled with Jumbo's strong cashflow generation ability, this would enable the group to continue its growth without compromising its balance sheet strength. 



Competitive Advantage
The restaurant business is not complex, as far as investment analysis is concerned. Recipe for a successful restaurant business is essentially providing high quality food at a price that suits the spending power of target segment, maximise asset efficiency in serving diners, keep cost low, and replicate the success formula across locations. 

But the F&B business is competitive, due to the small local market that limits restaurant's scale of expansion. Existing operators have to constantly develop new ideas and creative offerings to stay ahead. The low barrier of entry also attract new players with similar concepts. Secondly F&B companies almost always have to venture overseas to seek further growth after local expansion has been maxed out. This has been the growth trajectory observed in other F&B companies such as Breadtalk, Tung Lok, Katrina etc. Inherently, there is execution risk, and F&B players need to maintain fine balance of adapting to foreign customers taste buds, and retaining restaurants unique identity and concept. 

I think that Jumbo would be able to implement its expansion plans well and grow into a regional F&B firm. Its record thus far has been good. My confidence is built on Jumbo's strong branding.

Firstly, it is not any typical restaurants or eateries that offer common, run-off-the-mill food. It has a verydistinct product offering as the only listed F&B player specialised in serving the de-facto national dish of Singapore: chili crab. And the dish, in itself, is already iconic which helped Jumbo to expand overseas successfully.

Jumbo's pricing and outlet locations further complemented its market positioning in consumers', tourists' and expats' mind as an upper scale restaurant serving good food worthy for festive celebrations, and the must-go destination to try the famous Singapore Chili Crab. 

I perceive its strong branding and association with chili crab plus its premium product had actually carve out a niche market in the competitive F&B landscape, which forms its rather formidable business moat. In some sense, it is much difficult for competitor to muscle its way into the high-end premium seafood segment with chili crab as the core product, compared to eateries offering japanese food, ramen, latest korean desserts, that are much more numerous in nature. 

Cost Structure in Detail
I look at Jumbo's cost structure for FY14 just prior to IPO period and its latest quarterly results, to find out if it has been keeping specific cost items well in-check despite its expansion past 3 years.


Its quite telling that Jumbo has been able to maintain its cost structure rather well. Most of its cost categories did not have big changes, and is being controlled at a similar percentage of revenue as per 3 years ago. In fact, the largest cost category COGS, has dropped from 38%  to 36.3%. Has it been able to source for better food and crab supplies at a lower cost with economies of scale?

However, understandably, the 2 important cost items for F&B operations have risen. Employees and Operating Lease Expenses increased from 27% to 28.7% and 7.9% to 9.5% of revenue respectively. These are not unexpected as the business is still expanding. In fact they have been managed quite well by with just over 1.6% increase, considering the revenue is 21% higher now. Hence I honestly would not flag them as a cause of concern.

In short, while Jumbo now incurred higher expenses to upkeep a much larger business operations, it is not having cost overrun in any areas and even the increase in operating leases and staff expenses have been managed well. 

And the management's successful experience in Shanghai should boost its odds of successful execution of growth plans in China market. 

Next post, I shall look at Jumbo's comparison with other F&B companies, and try to put a fair valuation to its stock price.

*Interested readers may also visit AlpacaInvestment blog, shareinvesetment, and Fundamentalsmatter for more info.

*Looking to initiate position in Jumbo. But before I completed my analysis, it has risen quite a bit. 





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