From PinoyInvestor.com’s partner brokerage company RCBC Securities:
“We are confident of the rebound of Jollibee Foods Corp. (JFC) after the Enhanced Community Quarantine (ECQ) in the Philippines given the company’s steady historical revenue and core net income growth performance.
Its domestic business, comprising 73% of systemwide sales, will provide a strong anchor. Even so, we expect weakness for the 2nd Half of the year 2020, as displaced overseas Filipino workers (OFW), including their families, remain a major market segment for JFC.
JFC’s 2019 Net Income down 21.7%
Jollibee Foods Corporation (JFC) reported 2019 net income of PHP 6.4 billion, down 21.7% year-on-year (yoy).
Excluding a non-recurring gain of PHP 3.2 billion from the revaluation of assets acquired related to Coffee Bean and Tea Leaf (CBTL), we estimate core net income at PHP 3.3 billion, 56.1% lower yoy. Smashburger and CBTL dragged earnings by PHP 3.0 billion and PHP 191.8 million, respectively.
JFC’s Revenues climbed to PHP 179.6 billion, up 11.5% yoy, lifted by the consolidation of CBTL starting the 4th Quarter (4Q) of 2019. Based on our estimates, revenues excluding CBTL grew 8.7% to PHP 175.2 billion on sales contribution of 270 new stores.
Same store sales growth fell to 2.9% from 6.9% in 2019, dragged by Red Ribbon supply shortage issues, Chowking’s inability to sell its flagship pork products in areas covered by the African swine fever-related pork ban, and poor performances of Smashburger and CBTL. However, blended same-store sales growth (SSSG) in the 4th Quarter of 2019 markedly improved to 4.0% from 2.5% in the 3rd Quarter, driven by the easing of Red Ribbon’s supply tightness and improvement in Smashburger’s same-store sales growth (SSSG).
Cost of sales rose 12.8% to PHP 151.0 billion, while operating expenses hiked 16.9% to PHP 22.8 billion upon consolidation of CBTL-related expenses and a Smashburger-related provision for asset impairment worth PHP 345 million. Thus, EBIT fell 25.1% yoy to PHP 5.9 billion, while EBITDA ended flattish, growing only by 0.8% to PHP 21.8 billion.
Operating expenses grew 16.9% to PHP 22.8 billion, on higher CBTL-related personnel costs and a Smashburger-related provision for asset impairment worth PHP 345 million. Thus, EBIT fell 25.1% yoy to PHP 5.9 billion, while EBITDA ended flattish, growing only by 0.8% to PHP 21.8 billion.
How COVID-19 affected JFC’s operations
Internationally, store closures of JFC subsidiary Yong He King in China have gone down from 107 at its peak to 22 stores upon lifting of the lockdown in Wuhan. Meanwhile, the COVID-19 pandemic has grounded the rest of JFC’s global operations to a partial standstill. JFC’s operations in the United States, Europe, Middle East, and other parts of Asia have also been disrupted. With this, we estimate 35% of JFC’s global store network temporarily closed with 55% running on limited operations, and only 10% remaining open.
In the Philippines, the implementation of the Luzon-wide ECQ has brought 46% of JFC’s domestic stores to temporarily close, while those that remain open are limited to offering delivery, drive-thru, and take out services.
Delivery, drive-thru, and take out services cushion the impact of the lockdowns, but we estimate this at only 33% of average systemwide sales per month. This translates to an 8% cut in systemwide sales and revenues, along with a 3% drop in net income, per month of lockdown. We estimate a total of PHP 45.0 billion in foregone systemwide sales based on the assumptions of a two-month lockdown and dampened consumer demand post-ECQ.
JFC seems resilient despite profitability issues
Operating and inventory costs will set back profitability margins as these are reduced at a slower pace in contrast with the sudden shrinkage in sales. JFC also released a PHP 1 billion emergency response fund to support its employees and spent another PHP 220 million in food aid. On the plus side, around 65% of JFC’s direct costs are variable and, therefore, will drop proportionately with sales.
Furthermore, as it was in 2019, JFC’s earnings will be constrained by its Smashburger and CBTL acquisitions. However, cost reduction initiatives for CBTL and closure of unprofitable stores for Smashburger may accelerate to mitigate impact. We expect faster turnaround for CBTL as profitability is mainly burdened by overhead costs, which the company had already planned to significantly cut prior to the crisis.
Despite the challenges to profitability, JFC’s balance sheet will remain resilient. JFC’s debt obligations hiked in 2019 due to short term loans taken out for its CBTL acquisition, which caused net debt-to-equity ratio to end at a historic high of 1.3x and debt-to-equity at 1.7x.
However, 91% or PHP 20.3 billion of JFC’s short-term obligations have already been pre-paid by proceeds from its US$600mn senior perpetual capital security issuance last January, which will be booked as equity moving forward. In addition, only PHP 3.4 billion or 15% of its long-term debt will mature this year.
Expect a rebound for JFC after ECQ
Lockdowns have suppressed discretionary spending, but we expect demand to resume once the ECQ is lifted. We are confident of a rebound given the company’s steady historical revenue and core net income growth performance, while the domestic business, comprising 73% of systemwide sales, will provide a strong anchor. Even so, we expect weakness for the 2nd Half of the year, as displaced overseas Filipino workers (OFW), including their families, remain a major market segment for JFC.
The Bangko Sentral ng Pilipinas forecasts a 0.2-0.8% decline in OFW cash remittances this year vs. a 4.1% growth in 2019, while the World Bank expects an even larger 13% drop. These are important leading indicators as cash remittances fuel Philippine household consumption, which comprised 68% of GDP in 2019, while food and non-alcoholic beverages comprised the biggest chunk of household consumption at 41%.
JFC’s Revenue and Net Income Forecasts
We forecast a 4% decline in revenues this year to PHP 171.8 billion and only a 9% increase in core net income to PHP 3.5 billion, coming from a low base in 2019. Along with this, we assume a 10% decline in SSSG and forecast only 2% growth in systemwide sales, mainly lifted by the full year consolidation of CBTL.
For 2021, however, we anticipate an 18% increase in revenues to PHP 202.5 billion as consumer spending recovers, while net income will recuperate to PHP 5.2 billion, up 46% year-on-year.
Should I buy the stock of JFC?
We downgrade our Target Price for JFC from PHP 189.00 to PHP 149.00 per share, based on our forecasted 12-month forward Earnings per Share (EPS) of PHP 3.75, to which we applied a Price-Earnings (P/E) midway between current 12-month forward P/E of 38.9x and JFC’s average 2018 P/E of 40.4x.
Thus, the expected composite return for the JFC stock in the next 12 months, including a forecasted dividend yield of 0.8%, would be 2.2%. Hence, for now, we recommend a HOLD on the stock of JFC.”
NOTE: This report was prepared by RCBC Securities and published in partnership with PinoyInvestor.com. PinoyInvestor is a Philippine-based stock reports subscription service that provides detailed analysis and recommendations from stock brokerage companies, including RCBC Securities, on how to profitably trade the Philippine Stock Exchange (PSE). Sign up here to get your free PSE stock reports!
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- PSE Daily Market Outlook
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- Fundamental Analysis with Stock Price Targets
- Technical Analysis with Stock Price Support and Resistance
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