Jollibee Foods Corp: Buzzing with ambition

Investment Recommendation: BUY

Current Price (₱): 282

Target Price (₱): 305

Potential Upside (%): 8.2

Shares outstanding (B): 1.09

Market cap (B ₱): 307.4

52-week price range: (₱) 182.10 - 295.26

Investment Summary

Jollibee Foods Corporation (JFC) is on a crusade to make its mark on the international quick service restaurant scene and it is generating quite the buzz as it goes about doing so. Within the next five years, the company is planning to double its number of stores globally to 8,000 and has maintained its spectacular growth over last few years and looks likely to keep its streak going. The stock bolted out of the blocks this year, gaining 16% within January before contracting during the global selloff in early February. Jollibee delivered another strong performance in 2017, its revenue and income growing at 16% and 11% respectively. With an ambitious masterplan supported by encouraging macro fundamentals and plenty of ammunition for execution, Jollibee is one stock that we believe will continue to deliver returns as sweet as honey.

Company Background

Jollibee Foods Corporation is a multinational developer, operator and franchisor of fast food restaurants from the Philippines. It dominates the domestic market, with its local market share greater than that of all other multinationals combined. Alongside its flagship fast food restaurant Jollibee, the group also owns several other subsidiaries, both local and foreign, such as Greenwich Pizza, Chowking and Mang Inasal, gradually acquiring them over the years. Having conquered the domestic market, JFC has signalled its intention to push through aggressive international expansion over the next few years to establish itself as a major international player in the quick service restaurant (QSR) scene.

Industry Outlook

Supported by the rising global middle class, the quick service restaurant industry is projected to expand at a healthy pace. In 2016, the global fast food market was valued at over US$ 540 billion and this figure is set to hurtle past US $690 billion by 2022, with a projected CAGR of around 4.20% over the period. The QSR industry is fragmented with many players of all sizes. While global behemoths such as McDonalds, Burger King and Subway have a global presence and are ubiquitous, there are also many smaller local players. Competition is intense and market players must adapt to the changing consumer preferences. Although there is an increasing awareness of the health and nutritional limitations of fast foods, especially in the more developed regions of the world, growth in the industry has been strong and is expected to continue in the coming years. Most of this growth is expected to be driven by emerging markets and in particular, Asia Pacific with its massive young population, rising disposable income and rapid urbanization. Other avenues for growth include integration of new technology with daily operations to increase efficiency and addressing the growing demand for healthier offerings.

Investment Thesis & Growth Catalysts

1). Strong domestic growth

The domestic Philippine market is integral to Jollibee’s growth and success, accounting for 81% of system wide sales in 2016. Although the company’s eventual goal is to achieve a revenue split of 50/50 between domestic and international markets, the local market provides an excellent foundation through its sustained strong performance to support a global expansion. The pillar of this domestic growth story is the rising Filipino middle class buoyed by the country’s demographic dividend and urbanization potential. Euromonitor projects middle class households in the Philippines to grow by 41.8% between 2015 and 2030, which bodes very well for the company where the middle class make up a bulk of its customers. The domestic market has delivered very strong growth over the last five years with revenue CAGR of 13% over 2012 to 2017 and we believe that this domestic growth story still has the legs to go the distance.

2). International expansion

Having conquered the Philippine archipelago, global expansion is Jollibee’s next great frontier. The company is targeting 50% revenue contribution from international markets within the next five years and intends to achieve this through expansions and acquisitions overseas. It recently increased its stake in the American hamburger chain, Smashburger, which operates 365 stores in the United States, to 85%. This transaction increases Jollibee total global store network to 4,162 with the company planning to hit 8,000 stores in the next five years. Revenue from international markets has been growing marginally faster at a CAGR of 13.3% than the domestic growth rate over the same period. This growth rate should increase going forward as Jollibee looks to pursue overseas growth aggressively through expansions in existing markets and entry into new ones such as Europe, Japan and Australia. With negative net debt, strong liquidity and solvency ratios and a cash rich balance sheet, the company should not have much issue funding its expansion and acquisitions.

3). Strong macroeconomic support

The Philippine economy has been chugging away steadily over the past decade, recording growth above 5% on average. In 2017, it expanded further by 6.7% and is projected by the World Bank to deliver similar levels of growth in 2018 and 2019. It will continue to retain its title as one of Asia’s fastest growing economy as the country navigates through Rodrigo Duterte’s firebrand presidency. The government has embarked on an ambitious national infrastructure upgrade through its “Build, Build, Build” program and exports have been doing well due to the weak Peso. Going forward, an immediate catalyst for economic growth should be the new tax law that took effect at the start of 2018. The reduced personal income tax under the Tax Reform for Acceleration and Inclusion (TRAIN) bill should encourage consumer spending and also indicates the government’s willingness and eagerness to push through economic reforms.

Investment Risks

The key risks for JFC would be inflation risk and commodity risk. The Philippines’s strong economic performance is set to continue into 2018 and with the recent tax reform, inflation could be pushed higher due to the increasing demand side pressures. Rising oil prices could also stoke inflation which may hamper consumer spending. In addition, the rapid global expansion might be disruptive if not done properly and Jollibee needs to ensure that its acquisitions are strategically sound and not pushed through just for the sake of expansion.

References

https://blog.euromonitor.com/2015/09/top-5-emerging-markets-with-the-best-middle-class-potential.html

https://www.rappler.com/business/192898-philippine-gross-domestic-product-2018-fmic

https://beta.philstar.com/the-freeman/cebu-business/2017/11/13/1758622/demographic-dividend-crucial-philippines-growth

https://www.rappler.com/newsbreak/iq/193170-train-tax-reform-law-effects-filipino-consumers-workers

http://www.interaksyon.com/jollibee-nets-p7-1b-in-2017/

http://manilastandard.net/business/corporate/240938/jollibee-plans-8-000-stores-in-5-years.html

https://www.foodlogistics.com/warehousing/news/12091421/global-fast-food-market-to-grow-through-2019-as-developing-markets-urbanize

https://www.shopkick.com/partners/blog/the-fast-food-industry-growth-statistics-that-should-shape-your-advertising-strategies/

https://www.rappler.com/business/192977-inflation-rate-philippines-december-2017