DBS Group Research analyst Alfie Yeo has maintained “fully valued” on Jumbo Group with a target price of 21 cents, which represents a 36% downside on the stock as at his report dated May 19.

“Our target price of 21 cents is pegged to -1.5 standard deviation (s.d.) of its historical average forward price-to-earnings (P/E)”, says Yeo.

To Yeo, the valuation for Jumbo is “mispriced” and that the market has overvalued the stock.

“Jumbo’s book value stands at 7 to 8 cents per share with net cash of 3.3 cents per share (as at 1HFY2021), supporting just [around] 10% of the current share price,” he writes.

Based on his current earnings projections, Jumbo is overpriced at 28 times FY2022 P/E and 15.8 times FY2023 P/E.

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The way Yeo sees it, the market has priced Jumbo at normalised earnings “way ahead of the Covid-19 recovery”.

At its current share price, the market is expecting Jumbo to stage a firm turnaround to $10.6 million for FY2022 profit based on a normalised 20 times forward P/E, which is over 40% ahead of his $7.5 million estimate, says Yeo.

The recovery scenario assumes a measured and gradual easing of circuit breaker restrictions, with social distancing still practised as a precaution, and a slow return of tourists to Singapore. 

Jumbo’s main revenue and earnings are derived from Singapore, particularly Jumbo Seafood. It is estimated that pre-Covid-19, tourists had made up about half of Jumbo Seafood Singapore’s diners. Thus, the absence of tourists could weigh on Jumbo’s recovery. 

For now, Jumbo is reducing its presence in tourist areas and opening mass market brands in the heartlands with newly acquired Kok Kee Wanton Noodle and Ng Ah Sio Bak Kut Teh. Thus, Yeo believes recovery should occur in FY2023 with vaccines being administered. 

On this, Yeo has also projected weak near-term earnings for Jumbo, with an estimated net loss of $5.3 million in FY2021, a partial recovery in FY2022, before making a full recovery from FY2023 onwards. 

“With the heightened alert, we assume that 2HFY2021 recovery would see a dampened recovery, with breakeven taking place in FY2022 and normalisation happening in FY2023,” he says.

Hence, it is expected that restaurant sales would decline and post flat y-o-y performance for the months of May and June, as consumption levels for restaurants revert back to Phase 1 and Phase 2 levels. 

Yeo has also slashed his earnings forecast for FY2022 from $13 million to $7.5 million.

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Despite these, Yeo does not foresee pressure on cash flows due to the generation of positive operating cash flows in 1HFY2021 on the back of minimal jobs support scheme (JSS) government subsidies. 

Additionally, improved cash flows are expected based on DBS’s recovery trajectory assumption coupled with Jumbo’s new positioning strategy. 

That said, Yeo acknowledges that his earnings estimates for the FY2021 is “below consensus” as slower recovery expectations are factored. 

Additionally, the report states “including operational risks, [DBS Group Research] sees [Jumbo Group’s] China operation’s failure to deliver earnings growth as a key risk to our earnings growth projection.”

As at 2.50pm, shares in Jumbo are trading flat at 34 cents or 4.2 times P/B, according to DBS’s estimates.