06 December 2013 Asia Pacific/Philippines Equity Research Restaurants Jollibee Foods Corporation (JFC.PS / JFC PM) Rating OUTPERFORM* Price (05 Dec 13, P) 174.00 INITIATION Target price (P) 205.00¹ Upside/downside (%) 17.8 Mkt cap (P mn) 183,112 (US$ 4,175) Great fast food comes at a price Enterprise value (P mn) 179,459 Number of shares (mn) 1,052.37 ■ Initiating coverage with OUTPERFORM and 20% total return potential Free float (%) 40.9 upside. Rather than drawing the obvious conclusion that Jollibee is 52-week price range 185.0 - 102.0 overvalued (history has proven this to be a questionable stance), our thesis ADTO - 6M (US$ mn) 2.6 is that ~20% EPS growth, positive surprise potential, higher returns, 40%+ *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. FCF growth and higher cash distributions to shareholders cannot be ¹Target price is for 12 months. underestimated. Jollibee is an immensely relevant consumer company Research Analysts where 11% of the Philippine population visits one of the company’s outlets Karim P. Salamatian, CFA every single week. 852 2101 7996 ■ Three pillars to defining a superior consumer franchise. Empirical data [email protected] supports that consistent EPS growth, high and rising excess returns, and Rebecca Kwee financial prowess are the key criteria that determine whether consumer 852 2101 7951 [email protected] companies can trade at PEG ratios of 2.0-2.5x. Jollibee has among the best earnings growth track records, the highest and fastest rising excess returns and one of the best balance sheets and FCF generation profiles of NJA consumer companies. ■ Home is the foundation, abroad is the catalyst. The Philippines is our most preferred consumer market for 2014 because consumption growth can sustain at 1.5-2.0x higher than historical trends. We believe 80% of Jollibee’s sales growth will come from the Philippines over the next three years. By deploying excess capital behind ROIC-accretive expansion both home and abroad, the value of their existing franchise should rise by 16% annually. In addition, we believe there is >50% probability that the company enters Indonesia, which would be incremental to earnings and is not factored into today’s share price. ■ Upside driven by earnings growth. We have a high degree of confidence in our above-consensus EPS forecasts and that this will drive share price gains from here. Our P205 target price assumes flat multiples. Downside risks include macroeconomic, forex, acquisition and natural disaster risks. Share price performance Financial and valuation metrics Year 12/12A 12/13E 12/14E 12/15E Price (LHS) Rebased Rel (RHS) Revenue (P mn) 71,059.0 80,688.9 91,710.7 104,100.4 160 180 EBITDA (P mn) 7,052.1 8,512.7 9,943.8 11,673.9 140 EBIT (P mn) 4,346.5 5,505.6 6,595.1 8,234.7 130 120 Net profit (P mn) 3,728.2 4,601.0 5,439.0 6,723.5 100 EPS (CS adj.) (P) 3.51 4.34 5.13 6.34 80 80 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Change from previous EPS (%) n.a. Consensus EPS (P) n.a. 4.31 5.03 5.90 The price relative chart measures performance against the EPS growth (%) 13.5 23.4 18.2 23.6 PHILIPPINE SE COMPOSITE INDEX which closed at 6030.95 P/E (x) 49.5 40.1 33.9 27.5 on 05/12/13 On 05/12/13 the spot exchange rate was P43.86/US$1 Dividend yield (%) 1.3 1.4 1.8 2.3 EV/EBITDA (x) 25.5 21.1 18.0 15.0 Performance Over 1M 3M 12M P/B (x) 9.8 8.8 8.0 7.2 Absolute (%) -2.0 5.8 64.2 ROE (%) 20.5 23.2 24.8 27.6 Relative (%) 5.5 4.8 58.1 Net debt/equity (%) net cash net cash net cash net cash Source: Company data, Thomson Reuters, Credit Suisse estimates. DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON US ANALYSTS. FOR OTHER IMPORTANT DISCLOSURES, visit https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683 US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access 06 December 2013 Focus charts Figure 1: JFC has exposure to strong domestic trends Figure 2: Growth will primarily be driven by extracting and high-potential NJA markets greater profitability from existing assets … 2013E system-wide sales breakdown by country and major format 2013E-16E breakdown of EPS growth (% YoY) China 13% SSSG Store growth EBITDA Margin Expansion USA 3.5% 24% 24% Yonghe ASEAN & Other King Middle East 10% Mang 10% 2.5% 18% 18% Inasal Other 55% 9% 9% 67% Chowking 41% 45% 13% 15% Jollibee 49% 11% 13% Philippines 7% 81% 44% 34% 42% 26% 2013E system-wide sales P104bn FY13E FY14E FY15E FY16E Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 3: … as EBITDA per store is expected to rise Figure 4: This in turn should extend the impressive streak JFC 2012-16E EBITDA/avg. store (P mn) of consistent earnings growth … Quarterly EPS growth, % YoY 4.2 2012-2016E CAGR: 11% 90% 3.9 3.5 70% 3.1 2.8 50% 30% 10% -10% -30% FY11 FY12 FY13E FY14E FY15E 4Q06 1Q03 4Q03 3Q04 2Q05 1Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11 1Q12 4Q12 3Q13 2Q02 Source: Company data, Credit Suisse estimates Source: Company data Figure 5: … and push excess return expansion higher Figure 6: All while generating free cash flow and JFC 2012-15E ROIC and excess (ROIC- WACC) return maintaining strong balance sheet optionality JCF FCF per share and YoY growth (2012-16E) ROIC Excess Return (ROIC-WACC) Free cash flow per share (PHP) YoY% growth (RHS) 21.3% 10.00 140% 18.8% 8.63 17.1% 9.00 120% 8.00 7.60 14.8% 100% 13.1% 7.00 80% 6.00 10.6% 60% 5.00 8.9% 3.99 40% 4.00 3.32 6.6% 2.73 3.00 20% 2.00 0% 1.00 -20% 0.00 -40% FY12 FY13E FY14E FY15E FY16E 2012 2013E 2014E 2015E Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Jollibee Foods Corporation (JFC.PS / JFC PM) 2 06 December 2013 Great fast food comes at a price Jollibee is the largest foodservice operator in NJA by market capitalisation and sales with Jollibee is the largest 2,800 outlets (48% franchised) in ten different formats/concepts. Around 81% of system- foodservice operator in NJA wide sales come from the Philippines while the balance from nine other markets including with 2,800 stores across ten China, Vietnam, US, Hong Kong, Singapore and the Middle East. Jollibee’s strength can markets be defined by the fact that it is one of the most relevant consumer stories among NJA— Jollibee serves 11% of the Philippine population every single week. At first glance, it is easy to overlook Jollibee shares because of the valuation; however, we Don’t underestimate how believe doing so poses considerable Type II risk even at current levels. We do not the fundamentals can recommend underestimating Jollibee’s ability to deliver ~20% EPS growth, positive sustain the valuation surprises, rising returns and higher cash distributions to shareholders. Defining Jollibee’s consumer franchise Strong consumer franchises that can sustain large premium valuations have three things Jollibee has delivered EPS in common: (1) Consistent and visible earnings growth over long periods of time. Over the growth in 40 of the last 48 last 48 quarters, Jollibee has delivered positive YoY EPS growth 40 times at an average quarters, has high and rising rate of 15% YoY. Seventeen times in the past 21 years Jollibee has posted positive excess returns and a very earnings growth. Empirically, when large consumer companies generate consistent growth strong balance sheet over five years or more, PEG ratios average 2.5x. (2) High and rising excess returns over cost of capital. There is high correlation between valuations (EV/EBITDA and P/E) and excess returns (ROIC less WACC). Jollibee generates among the highest excess returns of its domestic consumer and NJA foodservice peers. On top of this, Jollibee is expected to increase its excess returns at a much faster rate over the next three years. (3) Financial prowess—cash to return to shareholders and/or pursue new growth. Jollibee has maintained a net cash position despite increasing its total assets and store count by 41% and 60%, respectively, since 2009. Its FCF is expected to grow 2x faster than earnings over the next three years. Maximising returns from existing formats With a total invested capital base of US$650 mn, the strongest driver of growth will come Growth will primarily come from existing assets, in our view. Over the next four years, we believe the company can from harvesting existing harvest its existing asset base better by increasing productivity at the Jollibee format in assets both the Philippines and international markets, building on the recent momentum in China and turning Vietnam profitable.