
The first time I had the famous Chili Crab by Jumbo Seafood was at their Dempsey Hill outlet. Imagine my surprise when I saw that their restaurant is packed on a Tuesday night. Even when we left the premises at 10pm, it is still relatively full, mostly tourists.
As I dug deeper into the company’s business operations and financials, I am confident that this is a workable, scalable business which will continue to grow as they execute their expansion plans.
Business Overview

Jumbo Group (SGX:42R) started with one Jumbo Seafood outlet at East Coast Seafood Centre, now it has grown into an established regional F&B brand with a wide network of F&B outlets including associated companies and franchises which spans across Singapore, China, Taiwan, Thailand, Vietnam, Japan and South Korea. They have 33 outlets of 8 different brand spanning across 12 cities in total.

Workable
Brand
The Jumbo Brand is very well received by tourists from countries all over the world. You can see tour buses flocking to their outlets everyday just to savour the taste of their seafood. This unique brand has given it a competitive edge which continues to attract customers since 31 years ago. I myself love their chili crab ( I tried the Alaskan King Crab version, love it).
Jumbo Seafood Outlets in China
A simple google search on the reviews would show that their seafood outlets are a hit with the Chinese. The response has been encouraging and it shows that they are on the right track since identifying China as an opportunity for growth in their IPO prospectus.

Financials

Since their IPO, their revenue has been on an increasing trend, driven by new outlets. HY2019 was lower as their Riverside outlet was closed for 4 weeks due to renovation but has since resumed operations.
As mentioned earlier, their strong branding has given them a economic moat and thus, an upper hand in pricing power. This is also shown in their high ROE and ROA.

Lastly, this is a very high cash generative business model with strong free cash flow. Looking at their negative cash conversion cycle, Jumbo is receiving payment much faster than they pay their suppliers.

Scalable
Expansion Plans
Armed with the industrial know-how and their strong branding, I believe that Jumbo Group is set for more aggressive expansion into China, subjected to economic conditions. An NUS investment group report (link here) also noted that Tier-1 cities like Guangzhou and Shenzhen are still “untapped”.
Since their IPO, the management has met their expansion plan targets thus moving forward, I have full confidence in them to continue opening new outlets in the near future. Gross margins would also improve as they benefit from bulk purchase discounts on raw materials due to economies of scale.

Franchising
Besides opening their own seafood outlets, Jumbo Group is also moving forward with the franchising model. This will enable them to earn an one-off franchising fee followed by recurring royalties which is a percentage based on the franchise’s revenue.
This low risk high potential-return business strategy will allow Jumbo to reap higher return on investments with minimal resource committed.

By utilizing this two-pronged approach, Jumbo would incur lower capital requirements and at the same time, allow them to scale much quicker with reduced capital risks. The franchise model will also help to offset the higher startup cost incurred in China.
Key Risk
Renminbi depreciation
This is a real concern due to the ongoing trade wars. Jumbo’s increasing exposure to the Chinese market would mean that currency risk is something to take note of.
Manpower Risk
F&B is a labour intensive industry and any labour shortages especially in Singapore would affect their bottom line.
Food Safety Risk
We have seen a fair share of F&B players getting into scandals due to food safety issues. Any lapse in food safety could tarnish their reputation and might have their operating license revoked.
Conclusion
Given Jumbo’s growth trajectory, unique branding and potential, I feel that it is a compelling opportunity to invest in a growth company that is workable and scalable.
Any opening of new outlets, acquisitions, franchise that would strengthen Jumbo Group’s market position and value-add to their business would be a catalyst for Jumbo Group to re-rate.
The Moss Piglet is vested in Jumbo Group (SGX:42R) at $0.37.