Founded in 1987, Jumbo Group Ltd (SGX:42R) operates one of Singapore’s most renowned seafood restaurant chains under the Jumbo Seafood brand. Besides Jumbo Seafood, the group has other F&B concepts including JPOT, NG AH SIO Bak Kut Teh, Chui Huay Lim Teochew Cuisine and J Café. Since its listing in 2015, Jumbo’s shares have performed well – more than doubling from its initial public offering price of S$0.245 to S$0.53 currently.
With that said, I thought it would useful to take a look at some business trends to see whether Jumbo Group makes a good investment going forward.
Rapidly expanding its store count has lead to revenue growth
Since its listing just two and a half years ago, Jumbo Group’s store count has risen from 16 outlets in Singapore and China to a total of 24 franchised or fully operated outlets across four countries.
Its aggressive expansion policy has, consequently, lead to consistent growth in its top line over the last few years. Below is a chart illustrating the company’s revenue growth since its financial year 2014 to the last 12-month period ending 31 March 2018.
Source: SGX StockFacts
Revenue during the period increased at a compounded annual rate of 7.1% from S$112.4 million in FY2014 to S$150.5 million in the last 12 months. The graph also demonstrates the company’s consistency in growing its sales each year.
Teething issues and rising operating cost eat into margins
Unfortunately, the group has failed to translate its increased revenue into meaningful profits.
As it increases it store count, the group has faced expansion-related costs that have eaten into its margins. For example, in the last quarter, the company reported a 6% jump in revenue year-on-year. However, at the same time, earnings per share decreased 22.2% to 0.7 Singapore cents from 0.9 Singapore cents a year ago. This was because operating expenses increased at a much faster rate than its revenue. As the company continues to pursue further expansion regionally, it is likely to see further margin erosion due to its expansion costs.
Jumbo Seafood is still the main revenue driver
Although it may seem that the group has managed to diversify its product offering through the introduction of a range of F&B concepts, its main revenue contributor is still its flagship brand- Jumbo Seafood.
It currently has five Jumbo Seafood outlets in Singapore and three in Shanghai. According to its 2017 annual report, its China operations contribute about 18% of revenue, while its Singapore outlets still make up more than 50% of its revenue. As such, the company is still highly dependent on the Jumbo Seafood brand.
Clean balance sheet and positive cash flows
Finally, the company has managed to use the funds from its initial public offering to clean up its balance sheet. It has no long-term debt, and has a strong net cash position of S$44.5 million.
Furthermore, the company generates a healthy cash flow from its operations. Operational cash flow have consistently been above the S$11 million mark, which gives it the financial muscle to continue pursuing its expansion plans.
The Foolish bottom line
When deciding whether to invest in a company, an investor should consider both the positives and the negatives of a business.
In Jumbo’s case, on the positive front, the group has a clean balance sheet and strong cash flows to support its aggressive expansion policy. It has also managed to grow its revenue each year over the past five years. However, on the flip side, the group has failed to deliver consistent earnings growth and increasing operating expenses have eaten into its margins. Investors should take all these factors into consideration before making an investment decision.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn’t own shares in any companies mentioned.