SINGAPORE (Aug 14): DBS Group Research is maintaining “hold” on Jumbo Group with a lower target price of 57 cents based on 23 times FY19F earnings.

This comes after the group’s latest 3Q18 set of results missed DBS’s expectations due to slightly lower-than-projected revenue and higher costs.

To recap, Jumbo’s earnings fell 35% y-o-y to $2.2 million over the latest quarter under review, booking lower gross margins due to higher fresh seafood costs and promotional prices in its new Jumbo Seafood outlets in China. The group also registered higher-than-expected operating expenses due to the expansion of China’s corporate office and marketing expenses.

In a Tuesday report, analyst Alfie Yeo says he sees the latest 3Q18 numbers as a reflection of Jumbo’s expansion phase.

This has prompted him to cut FY18-20F net profit forecasts by 5-13% on expectations of cost pressures in the near-term.

“Jumbo has increased its footprint very quickly since listing at end-2015… Costs have therefore increased in line with expansion plans. Growth and earnings contribution should kick in once new outlets become profitable,” explains Yeo.

Yeo’s projections come in below the consensus largely due to his expectations of a higher operating cost structure ahead, led by rents and depreciation.

Nonetheless, the analyst believes faster-than-expected outlet expansion for Jumbo, especially in China, and regional franchises would serve as potential catalysts for the stock going forward – provided that its cost structure does not deteriorate considerably.

“More franchise outlets should also deliver better growth once the number of outlets attain critical mass,” he adds.

As at 1.15pm, shares in Jumbo are down by 1.5 cents at $0.52.