209. 40 January 21, 2020 Jollibee Foods (JFC PM) BUY Share Price PHP 209.40 On better footing 12m Price Target PHP 247.00 (+18%) Previous Price Target PHP 247.00 Company Description Showing signs of recovery; Reiterate BUY Engaged in the development, operation, and We are encouraged on JFC’s current state of operations as we recently franchising of quick-service restaurants in the met the company. Although not yet out of the woods, across-the-board Philippines and worldwide improvement in both domestic and international operations in 4Q19 raised our confidence in JFC’s 2020 outlook. With 2019 behind us, we think that our PHP5.5b (+23.5% YoY) core income forecast for 2020E is Statistics achievable. Reiterate our non-consensus BUY as current price level 52w high/low (PHP) 325.00/184.10 remains attractive. Our earnings forecasts and DCF-based TP (WACC: 3m avg turnover (USDm) 2.7 7.3%; LTG: 3.0%) are unchanged. Free float (%) 42.6 Issued shares (m) 1,097 Baby steps for Smashburger Market capitalisation PHP229.7B USD4.5B Consumer Staples In 9M19, Smashburger generated roughly PHP1.3b in losses as SSSG Major shareholders: reached double-digit negative figures. By Dec 2019, Smashburger’s SSSG Hyper Dynamic Corp. 25.6% was negative low single-digit (4Q19: mid- to high- negative), a stark Honeysea Corp. 12.0% Winall Holding Corp 5.1% improvement. However, we expect the magnitude of losses to sustain in the near-term as store closures were back-loaded in 4Q19. JFC Price Performance accelerated store closures in 4Q19 (35 stores closed) from 15 stores 340 150 closed as of 9M19. Moving forward, we expect net store openings for 320 140 Smashburger which should result in positive operating leverage. 300 130 Updates over coffee 280 120 260 110 Philippines Similarly, The Coffee Bean & Tea Leaf (CBTL) showed better results in 240 100 4Q19 with topline growth of 5-7% in Asia Pacific and low single-digit in 220 90 the US. In our view, CBTL is an easier fix than Smashburger as CBTL’s 200 80 problem is more on cost containment. Meanwhile, Jollibee Worldwide 180 70 Pte. Ltd. (JWPL), a wholly owned subsidiary of JFC, recently issued Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 USD600m senior perpetual capital securities that will primarily be used Jollibee Foods - (LHS, PHP) Jollibee Foods / PSEi Philippine SE Index - (RHS, %) to refinance the short-term debt from the CBTL acquisition. This is not yet in our numbers as we await more details on the use of the proceeds. -1M -3M -12M Absolute (%) (2) (7) (36) Domestic recovery story intact Relative to index (%) 2 (2) (31) Source: FactSet On the domestic front, JFC still faced issues on some Chowking branches as some local government units continued to limit mobility of pork in 4Q19. Fortunately, SSSG of Chowking was already flattish by early Jan 2020 from negative figures in 4Q19. On the other hand, JFC is on track to fully fix the issues in the Red Ribbon commissary by 1Q20. FYE Dec (PHP m) FY17A FY18A FY19E FY20E FY21E Revenue 133,613 161,199 182,798 215,192 242,810 EBITDA 11,415 13,725 11,082 13,490 17,679 Core net profit 7,109 8,330 4,434 5,475 7,961 Core EPS (PHP) 6.61 7.76 4.14 5.11 7.43 Core EPS growth (%) 15.0 17.4 (46.7) 23.5 45.4 Net DPS (PHP) 2.18 2.49 1.80 1.70 2.48 Core P/E (x) 38.3 37.6 50.6 41.0 28.2 P/BV (x) 6.7 6.5 4.3 4.0 3.7 Net dividend yield (%) 0.9 0.9 0.9 0.8 1.2 ROAE (%) 19.1 18.7 11.5 10.1 13.6 ROAA (%) 8.7 8.2 3.5 4.1 5.9 EV/EBITDA (x) 23.5 23.1 22.0 18.1 13.6 Net gearing (%) (incl perps) net cash 6.0 34.6 31.8 23.7 Consensus net profit - - 7,803 9,093 10,691 MKE vs. Consensus (%) - - (26.0) (39.8) (25.5) Fredrick De Guzman [email protected] (63) 2 8849 8847 THIS REPORT HAS BEEN PREPARED BY MAYBANK ATR KIM ENG SECURITIES INC SEE PAGE 9 FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS Jollibee Foods Better prospects for 2020 JFC faced difficulties both in its domestic and international businesses in 2019 with net income (ex. revaluation gains) almost halved to PHP3.2b in 9M19 from PHP6.1b in 9M18. On the domestic front, JFC was challenged by 1) inflation overhang in 1H19, 2) Red Ribbon supply chain disruptions starting 2Q19, and 3) ASF-related issues at Chowking in 3Q19. JFC found no reprieve from its international operations as Smashburger posted losses of around PHP1.3b in 9M19 — already more than the total losses in 2018. In our initiation report (Jollibee Foods – Reclaiming lost glory; 6 Dec 2020), we recommended a non-consensus BUY on JFC premised on better operating performance by both its domestic and international businesses. Our recent meeting with the company suggests that our thesis for 2020 is on the right track. We believe that 4Q19 was a relatively better quarter as: Smashburger SSSG improved — albeit still negative — from double-digit negative figures to low single-digit negative by Dec 2019 (4Q19: mid- to high single-digit). CBTL topline growth hit mid- to high single-digit in Asia Pacific and low single-digit in the US. Domestic Chowking SSSG was flattish by early Jan 2020 from negative SSSG in 4Q19. Issues on Red Ribbon supply chain are on track to be fully fixed by 1Q20. Fig 1: 9M19 losses for Smashburger; 2019 losses are on track Fig 2: Domestic Chowking and Red Ribbon stores account for to exceed the 2016 level 15-17% of JFC’s systemwide sales Chowking Red Ribbon 1,600 1,519m 18.0% 1,400 1,320m 16.0% 5.0% 5.0% 5.0% 5.0% 1,200 14.0% 4.0% 4.0% 4.0% 979m 953m 1,000 12.0% 825m 793m 10.0% 800 8.0% 600 6.0% 12.0% 12.0% 12.0% 12.0% 12.0% 400 11.0% 11.0% 4.0% 200 2.0% - 0.0% 2013 2014 2015 2016 2017 9M19 2013 2014 2015 2016 2017 2018 9M19 Source: Smashburger financials, JFC disclosures, Maybank Kim Eng estimates Source: Company data *9M19 figure pertains to operating losses While we continue to take the view that Smashburger will not reach breakeven by 2020-2021, we believe that 2019 results were also not representative of future performance. In 2019, JFC closed 50 Smashburger stores which led to negative operating leverage and store impairments. Moving forward, management indicated that there will be fewer store closures and more store openings. On CBTL, we expect topline growth of 5.8% in 2020E (unchanged) which is in-line with blended sales growth in 4Q19 (mid- to high single-digit in Asia Pacific; low single-digit in the US) as per JFC’s guidance. In our view, CBTL is an easier fix than Smashburger as the problem is more on cost containment. Plans to turnaround CBTL (e.g. relocating head office, moving some production to Malaysia) will be initiated within the next 12 months. January 21, 2020 2 Jollibee Foods Fig 3: We expect CBTL to achieve EBIT breakeven by 2022 In PHPm 2017 2018 2019F 2020F 2021F 2022F Remarks Total revenues 15,149 16,487 16,514 17,464 18,491 19,600 Growth based on blended US and Asia Pacific growth as per Cost of goods sold (4,661) (4,837) (5,175) (5,386) (5,517) (5,653) Euromonitor and MKE estimates Gross profit 10,488 11,650 11,339 12,078 12,973 13,948 0.5ppt annual improvement in GPM Labor and labor-related costs (4,983) (5,152) (5,491) (5,719) (5,870) (6,027) Occupancy costs (2,613) (2,799) (3,134) (3,227) (3,231) (3,229) Assumed 0.5ppt annual improvement in the ratio of costs to sales General and admin (2,254) (2,302) (2,801) (2,875) (2,859) (2,834) EBITDA 638 1,398 (86) 258 1,013 1,858 Depreciation and amortization (1,386) (1,476) (1,478) (1,563) (1,655) (1,755) Deferred cost amortization (58) (473) - - - - One-off impairment of territory rights in China Cloud-based arrangement amortization - (28) (28) (28) (28) (28) EBIT (805) (578) (1,592) (1,333) (670) 76 Loss (gain) on sale of PPE 105 (28) - - - - Impairment of PPE (116) (104) (113) (113) (113) (113) Conservatively assumed continuous impairment of PPE and intangible Impairment of intangible assets (387) (179) (292) (292) (292) (292) assets Other income 140 164 - - - - Interest expense (171) (240) (132) - - - Acquisition eliminates debt in CBTL's balance sheet by 2020 EBT (1,235) (966) (2,129) (1,737) (1,074) (329) Provision for income tax (113) (142.8) 426 347 215 66 Tax rate assumed 20% (US corporate income tax rate) Net income before minority (1,348) (1,108) (1,703) (1,390) (859) (263) Minority interests (1) (1) 2 1 1 0 Minority interests as % of net income before minority maintained Net income after minority (1,349) (1,109) (1,701) (1,388) (859) (263) Source: Company data, Maybank Kim Eng estimates Issuance of perpetual securities Last 16 Jan 2020, JFC announced that its wholly owned subsidiary, Jollibee Worldwide Pte. Ltd. (JWPL), will issue USD600m worth of guaranteed senior perpetual capital securities with JFC serving as the guarantor.