Jollibee Foods Corp. (PHS:JFC, Financial), the ninth-largest fast food company in the world and Asia’s largest fast-food chain, delivered its quarterly earnings on Feb. 14.
Jollibee grew its sales by 13% to 114 billion Philippine pesos ($2.26 billion) and profits by 20% to 6.1 billion pesos. Despite the impressive gains, Jollibee Foods' local shares closed -0.5%.
CEO Ernesto Tanmantiong revealed the company opened the most new stores in its history during the year, which was possible due to improved returns on investments in its stores and its ability to open stores in better locations.Â
"We also renovated 200 existing stores in the Philippines and 150 stores abroad," Tanmantiong said. "We are allotting 14 billion pesos in capital expenditures in 2017, mainly for new store expansion and renovation (7.6 billion pesos) and commissary investments (5.6 billion pesos). We look forward to continued strong profitable growth in the years ahead in the Philippines and abroad."
(Jollibee mascot at a restaurant in Metro Manila, Nikkei)
Valuation
Jollibee currently trades at some discount compared to its peers in terms of earnings multiple. According to Reuters, Jollibee had a trailing price-earnings (P/E) ratio of 41 times (industry median of 50.4), price-book (P/B) ratio of 6.6 times (industry median of 5.3) and price-sales (P/S) ratio of 2 times (industry median of 2).
Jollibee also had an 0.82% annual dividend yield.
Total returns
Jollibee outperformed the local index on a long-term time frame. According to Morningstar, Jollibee had one- and five-year total returns of -3.4% and 16.5% while the iShares MSCI Philippines (EPHE, Financial) had 1.98% and 5.2%.
The Standard & Poor's 500, meanwhile, had returns of 24.7% and 14%.
Jollibee Foods
Jollibee Foods was founded 39 years ago and now operates, develops and franchises quick-service restaurants under the trade name Jollibee. In the Philippines, Jollibee has the following partially and wholly-owned subsidiaries: Fresh N’ Famous Foods, Red Ribbon Bakeshop, Mang Inasal and Perf Restaurants.
In 2015, Jollibee garnered 23.3% or 22.4 billion pesos of its net sales – excluding royalties – from overseas. This compares to 20.43 billion pesos in 2014.
Fresh N’ Famous Foods includes Chowking and Greenwich quick-service restaurants. Red Ribbon Bakeshop and Mang Inasal, on the other hand, operate their own namesake restaurants. Perf Restaurants franchises restaurants under the Burger King trademark in the Philippines.
Jollibee also operates international brands under the SuperFoods Group (2). Brands under this group include Yonghe King, Hong Zhuang Yuan and San Pin Wang. Other brands include 12 Hotpot, Sma and Dunkin’ Donuts (1).
As of December 2016, Jollibee had 3,254 stores worldwide – 81% of which are located in the Philippines. Jollibee exhibited 6.8% growth to 2,643 in total store count in the Philippines, while having a 4.8% drop to 611 in stores overseas.
Jollibee quick-service restaurants in the Philippines grew 7% to 978 stores and represented 30% of total store count worldwide. Chowking restaurants in the Philippines represented 15% of all Jollibee restaurants, followed by Mang Inasal at 14% and Red Ribbon at 12%.
Half of Jollibee’s overseas restaurant stores were represented by Yonghe King in China. As of December, Yonghe King total store count fell by 3% to 310.
Jollibee restaurant stores overseas, meanwhile, grew 20% to 167 stores. Vietnam had the largest store increase with 12 additional stores, followed by United Arab Emirates with four. Jollibee also opened its first restaurant in Canada last year.
Noticeably, Jollibee’s Dunkin' Donuts store count in China fell by 75% in the same period. Jollibee also experienced store reduction for its Chowking brand in the U.S., UAE and Qatar.
Ownership
Jollibee’s founder and current chairman, Tony Tan Caktiong, owned either directly or indirectly about 37.5% of the fast-food chain as per fiscal 2015. Hyper Dynamic Corp. and Honeysea Corp. each own 25.5% and 11.9%. The two aforementioned entities are owned or controlled by Caktiong and certain relatives.
Another 5.1% of Jollibee is owned by Winall Holding Corp., whose filings are owned or controlled by certain relatives within the fourth degree of consanguinity or affinity.
(17-A and 17-Q Filings, Jollibee)
(17-A and 17-Q Filings, Jollibee)
(17-A and 17-Q Filings, Jollibee)
Net sales
The net sales contribution to overall sales greatly outweighed any other revenue generator the fast-food giant has.
Jollibee's net sales consistently contributed 95% of total sales in recent years. In 2015, Jollibee net sales grew 11% to 95.81 billion pesos. Nine months into 2016, net sales grew another 12% to 78 billion pesos.
Royalty fees
Jollibee has several royalty and franchise agreements with independent franchisees, allowing them to operate the quick-service restaurant outlets under brand names such as Jollibee and Chowking.
In 2015, 4% or 4.33 billion pesos of total Jollibee sales came from royalty fees alone. The segment grew 11% in sales in that fiscal year.
Nine months into fiscal 2016, the royalty fee business logged another 15% growth to 3.6 billion pesos in total sales compared with 3.11 billion pesos in the year prior.
Franchise fees
Franchise fees, meanwhile, experienced 24% growth and contributed 0.2% or 189.1 million pesos to total Jollibee sales in 2015.
Nine months into fiscal 2016, franchise fees logged a whopping 72% sales growth and contributed 0.2% or 182.1 million pesos to sales.
Rent income, service fees, scrap sales and other revenues
Other segment sales contributed 12% average sales growth and represented the remaining 0.45% of total Jollibee sales in 2015.
The same group grew 41% on average sales and represented 0.58% of total sales in the recent three quarters of operations in fiscal 2016.
Noticeably, other than franchise fees, Jollibee’s service fees and other revenues jumped 88% on average. According to company filings, other revenues pertain to delivery fees and other miscellaneous revenues earned by the fast-food chain.
On average, Jollibee had three-year sales and profit growth and profit margin averages, including fiscal 2016 figures, of 12.4%, 10.4% and 5.5%.
Cash, debt and book value
As of September 2016, Jollibee had 14.3 billion pesos in cash and cash equivalents. It also had 10.35 billion pesos in debt with a debt-equity ratio of 0.31 times, Â up from 0.19 times the year prior.
The Philippines’ largest fast-food chain had 14% of its 66.9 billion pesos assets in goodwill and intangibles, while having a book value of 33.2 billion pesos compared to 30.93 billion in the year earlier period.
Cash flow
(17-Q, Jollibee)
Nine months into fiscal 2016, Jollibee experienced a 3% drop in its cash flow from operations to 9.98 billion pesos compared to the year prior. As observed, the company had lower impairments related to receivables, including a marked reduction in receivables and inventories compared to operations in 2015.
Capital expenditures were 4.59 billion pesos, which left Jollibee with 5.4 billion pesos in free cash flow compared to 3 billion pesos last year. The fast-food giant allocated 16% or 850 million to dividends.
Jollibee also allocated 2 billion pesos to purchase the remaining 30% stake in another local fast-food chain – MangInasal.
(17-A and 17-Q Filings, Jollibee)
On average, Jollibee allocated 8% of its free cash flow to dividends in the past three fiscal years.
Meanwhile, Jollibee also took in 137 million pesos in debt, net repayments, in the past three quarters.
The company was also able to raise 339.4 million pesos from issuing shares – compared to the 358.2 million pesos it raised the year before. In review, Jollibee had 1.077 billion total common shares outstanding in February, an increase from the 1.067 billion shares the year before.
Conclusion
Jollibee delivered impressive sales and profit figures that exceeded its recent yearly average for fiscal 2016. The fast-food chain also maintained an acceptable leveraged balance sheet, including a conservative free cash flow payout as per its dividends to shareholders.
The company also remained rather relevant and finds unique marketing approaches to its customers. Jollibee’s recent series of short videos tailored to Valentine’s Day eclipsed 14 million views on Facebook (FB) alone since being published a couple of weeks ago.
Nonetheless, the Philippines' 16th-largest publicly listed company – unbelievably – has yet to update its investor relations website – the information found on it reflected fiscal 2013 operations.
(Screen Shot of Jollibee’s Investor Relations Website as of Feb. 18, 2 p.m. Pacific Time).
Meanwhile, Jollibee’s growth came in both of its local and foreign businesses despite the falling store count in China and overseas. Despite having good sales and profit growth figures, Jollibee has also been consistently diluting its shares through issuances of new shares outstanding, which conservative investors may find unappealing.
In review, Jollibee experienced a 10% profit decline in fiscal 2015 as a result of information technology upgrades, network development organization, an acquisition deal of Smashburger and extra logistics expenditures. Chief Financial Officer Ysmael Baysa said Jollibee does not expect the same rate of expenses in ensuing years.
(Jollibee Share Price Performance One-Year Time Frame vs. EPHE and IVV, Financial Times)
Jollibee had a median price target of 222 pesos a share among the 10 analysts that cover the stock. Using historical figures and applying a 20% margin, local Jollibee shares have a value of 198 pesos a share (3).
Nonetheless, investors should demand more cash flow allocation to dividends from the happy bee, halting share issuances moving forward.
In summary, Jollibee is a hold with a 205 peso price target.
Notes
1. Recent 17-C filing: Jollibee has a 50% interest in joint ventures for the following stores: Highlands Coffee (Vietnam and Philippines) with 170 stores.
Pho 24 (Vietnam, Indonesia, Cambodia, Korea and Australia) with 34 stores.
Jollibee has another 48% interest in 16 of 12 Hotpot (China) stores and a 40% interest in Smashburger.
In total, the joint ventures have 612 stores worldwide and are not included in Jollibee's consolidated store count.
2. 17-A Filing in 2016.
3. Me: five-year historical earnings multiple of 40 times and five-year growth rate of 10%.
Disclosure: I have Class B shares in Berkshire Hathaway and Jollibee Foods local shares.
Start a free seven-day trial of Premium Membership to GuruFocus.
