Broker’s Call: JFC | Oct 4, 2021 | FirstMetroSec

90

Bringing back the JOLLI in the BEE

  • Quarterly sales have stabilised at P34-37bn
  • Leaner operations allows for margin recovery
  • Losses from Smashburger and CBTL have narrowed
  • Upgrade to BUY, raising target price to P228.00

Jollibee Foods Corp.

BUY
Price Target P228.0

What’s New: Upgrade Jollibee Foods Corp. (JFC) to BUY and raising our target price (TP) to P228.00, as we rollover our valuation base to FY22F and introduce FY23F earnings. We have cut FY21F earnings by 73%, to reflect the fluid quarantine restrictions imposed to contain the surge in Delta variant cases. Nevertheless, our earnings forecast for next year is intact. On one hand, we temper our expectations on the sales contribution of Coffee Bean and Tea Leaf (CBTL) stores given that management has rationalised nonperforming outlets. On the other, we lift our margin assumptions in view of the positive impact of JFC’s business restructuring initiatives, recovering food services demand globally, and lesser drag from the loss-making businesses of Smashburger and CBTL. Overall, these factors should pave the way for better stock performance next year.

Despite fluid quarantine restrictions, we believe quarterly sales have stabilised to a sustainable range of P34-37bn over the past three quarters. As the decline in topline had bottomed out last year, we are of the view that it can only get better from here onwards.

Business restructuring and network rationalisation are supportive of margin recovery. In the past year, management has undertaken an all-encompassing business transformation program where JFC has permanently closed 262 stores globally: 100 in the Philippines, 31 in China, 55 in North America, 58 CBTL stores, and 19 SuperFoods stores. In addition, 4 commissaries in the Philippines have been shut down, apart from headcount reduction in branches and offices worldwide. We are positive that these cost optimisation initiatives have reduced costs in FY21F and should be supportive of margins moving forward. In 1H21, JFC’s EBIT margin significantly improved y-o-y to 4% (1H20: -10.3%) and is only 30bps short of 1H19 level.

Smashburger and CTBL businesses should contribute to earnings sooner rather than later. While robust growth from these segments is likely to be realised later, we take comfort that the accelerated restructuring process will allow both businesses to pare losses this year and next. Both businesses are targeted by management to reach breakeven this year, with Smashburger and CBTL respectively posting only P150m and P30m in EBIT losses in 1H21 – a significant turnaround from our estimated losses of P2-3bn in FY19. This gives us confidence to look ahead, as the faster reopening of developed markets should help these businesses recover faster.

Recommendation: Upgrade to BUY, raising TP to P228.00 as we rollover our DCF-based valuation to FY22F. We assume WACC of 6.9% and 3.0% long-term growth. The implied PE is 49.2x FY22F EPS vs pre-COVID mean of 37.7x. We expect the positive developments to pave the way for better stock performance next year.

SOURCEFirst Metro Securities
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