JBFCF - Jollibee Foods: Positive Short-Term And Long-Term Prospects (Rating Upgrade)

2023-12-19 17:54:42 ET

Summary

• Jollibee Foods is the leader in the Philippines' quick service restaurant market with a 50% market share, and its Philippines business delivered a good +16.5% System-Wide Sales growth in Q3.
• The company aims to have its international businesses contribute half of its sales in a couple of years' time, and this seems achievable with its emphasis on franchising.
• I raise my rating for Jollibee Foods to a Buy in view of its favorable outlook for the short term and long run.

Elevator Pitch

My investment rating for Jollibee Foods Corporation ( OTCPK:JBFCF ) [JFC:PM] is a Buy.

Earlier, I wrote about how Jollibee Foods coped with the headwinds posed by the COVID-19 pandemic in my August 20, 2020 write-up for the stock.

In this current article, my focus is on the business outlook for Jollibee Foods. JBFCF's prospects for the short term are decent thanks to the positive growth momentum for the company's Philippines operations. In the long term, the company's focus on franchising should enable it to meet its target of having 50% of its top line derived from overseas markets in a few years' time. Also, I think that Jollibee Foods' stock is undervalued based on the EV/EBITDA metric. The above-mentioned factors explain why I have made the decision to upgrade my rating for Jollibee Foods from a Hold to a Buy.

Investors should note that Jollibee Foods' shares are traded on the Over-The-Counter Market and the Philippines Stock Exchange. The mean daily trading value for Jollibee's OTC shares for the past 10 days was around $10,000 as per S&P Capital IQ data. The company's Philippines-listed shares boasted a considerably better 10-day average daily trading value of roughly $3 million. Jollibee Foods' shares listed on Philippines Stock Exchange can be bought or sold with brokerages providing access to Asian equity markets like Singapore's OCBC Securities and Hong Kong's Monex Boom Securities.

Dominant Player In Its Home Market Which Performed Well For The Latest Quarter

In its most recent Q3 2023 results announcement , Jollibee Foods revealed that the company's net profit attributable to shareholders increased by +4.7% QoQ and +13.6 YoY to PHP2,434.4 million in the third quarter of this year. JBFCF's actual Q3 bottom line beat the sell-side analysts' consensus net income forecast of PHP1,988.6 million (source: S&P Capital IQ ) by a substantial +22.4%.

The outperformance of Jollibee Foods' home market, the Philippines, is the main reason for the company's significant earnings beat in the latest quarter.

JBFCF is the undisputed leader in the Philippines' quick service restaurant market with a 50% market share . The company's Philippines business achieved a very impressive +16.5% YoY growth in SWS or System-Wide Sales for Q3 2023. As indicated in the chart presented below, Jollibee Foods' Philippines operations registered a much faster pace of SWS growth as compared to its other businesses.

The System-Wide Sales Or SWS Growth Rates For Jollibee Foods' Various Businesses As Compared To Last Year

At the company's Q3 2023 results call , Jollibee Foods cited positive factors such as "the right pricing strategies", the return of "dine-in" in a post-pandemic environment, and the growth of "digital channels" due to "convenience" as the key contributors to its strong mid-teens percentage SWS growth for the Philippines business in the recent quarter.

Looking ahead, JBFCF guided at its third quarter results briefing that "we do not see any reasons in the Philippines that our fourth quarter (revenue) will slow down versus our third quarter."

One key revenue driver is potential price hikes. There is room for further price increases, as Jollibee Foods only raised its average product prices by under 1% for the latest quarter.

Another key revenue driver is the solid demand for food consumption in the Philippines. A December 15, 2023 economic commentary posted by ING cited the significant +14.9% growth in "restaurants & accommodation" spending in the Philippines for Q3 2023 as a key statistic to support its view that post-pandemic "revenge spending" is still alive" in the country.

The market is currently forecasting that Jollibee Foods' net income attributable to shareholders will expand by +10.8% QoQ from PHP2,434.4 million for Q3 2023 to PHP2,697.4 million in Q4 2023. In my opinion, this is reasonable, considering the positive outlook for its core Philippines business. As of September 30, 2023, JBFCF had a network of 6,720 restaurants, of which more than half or 3,295 of them are located in its home market, the Philippines.

Expansion In International Markets Is The Major Growth Driver

JBFCF's near term growth prospects are underpinned by the strength of the company's domestic business operations as detailed in the prior section. On the other hand, Jollibee's intermediate to long term business outlook is linked to its expansion in overseas markets outside the Philippines.

Franchising holds the key to Jollibee Foods' potential success in expanding rapidly in overseas markets. The company stressed at its Q3 earnings briefing that it doesn't "want to build businesses based on a lot of upfront investments and very little return." Instead, Jollibee Foods emphasized at the company's most recent quarterly earnings call that it is focusing on "the franchise model where we can go very capital-light" and "start to enjoy right away the royalties and other income flows."

Based on disclosures in the company's Q3 2023 results presentation slides , 85% (365 stores) of the total gross store openings (429 stores) for Jollibee Foods in the first nine months of 2023 came from the company's international markets. JBFCF didn't disclose the exact split between company-operated and franchised stores for the new store additions, but it is realistic to assume that most of the company's future store openings will be executed with the franchise model. Jollibee Foods guided at the company's Q3 2023 earnings call that "we do not plan to open any more or a lot more of company-owned stores in the future, but rather really accelerate our franchising strategy."

As per financial data sourced from S&P Capital IQ , Jollibee Foods grew its revenue generated from international markets by a reasonably high CAGR of +19% in the time period between 2010 and 2022. Looking ahead, JBFCF's goal is to increase the company's revenue derived from overseas markets as a proportion of total sales from 39% in FY 2022 to 50% by FY 2027 based on an October 2022 Nikkei Asia interview with Jollibee Foods' CEO.

In summary, JBFCF's focus on a franchising approach towards new store openings puts the company in an excellent position to drive future top line growth with its foreign markets expansion.

Closing Thoughts

JBFCF boasts a positive outlook for both the near term and long run, and I deem its shares to be undervalued. A stock is typically determined to be trading at below fair valuation, if the company's earnings multiple is at a discount to its future earnings growth rate. The market currently values Jollibee Foods at 9.8 times consensus forward next twelve months' EV/EBITDA as compared to its consensus FY 2023-2025 EBITDA CAGR estimate of +14.9% (source: S&P Capital IQ ). As such, I award a Buy rating to Jollibee Foods.

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