Jollibee Foods Corporation FRI 24 SEP 2021

Profitable despite headwinds

from the delta variant
JFC’s sales recovery likely deteriorated during the third quarter following the spread of the more
transmissible COVID-19 delta variant in the Philippines and other countries. Nevertheless,
we expect the company to remain profitable on the back of the business transformation
HOLD
program implemented last year as well as new initiatives to strengthen its off-premise sales.
In addition, the Philippine government already started easing restrictions in September in TICKER: JFC
light of the faster vaccination rollout. FAIR VALUE: 220.00
Profitable despite headwinds from the delta variant. In our view, JFC will remain CURRENT PRICE: 203.40
profitable despite headwinds from the delta variant. We expect operating income and UPSIDE: 8.16
earnings this year to reach Php5.7Bil and Php2.8Bil, respectively. This is on the back of
the business transformation program implemented last year. Recall that the company
permanently closed 486 unprofitable stores worldwide and four commissaries in the
Philippines. Furthermore, headcount as well as operating and general and administrative
expenses were significantly reduced in stores, supply chain facilities, and support group
offices. In fact, while first half revenues were 15% lower vs 2019 levels, operating income
was only 2% lower. This compares favorably vs other listed restaurants. Although there is
pressure on raw material cost due to higher commodity prices, the company successfully
implemented several price increases from 4Q20 to 2Q21 which should help temper the
impact. Overall, we expect margins to further improve once sales recovery resumes.
Maintain HOLD. We are increasing our FV estimate on JFC by 10% to Php220/sh after
rolling over our estimates to 2022. However, we are maintaining our HOLD rating given
that the upside to our target price is limited. While there are headwinds from the spread of
the delta variant, we believe the worst is over. We expect the company to remain profitable
on the back of the business transformation program implemented last year coupled with
new initiatives to strengthen off-premise sales. Moreover, domestic vaccination rate had
also increased amidst the steady availability of supply. We believe this will boost consumer
confidence and business confidence and spending. Nevertheless, valuation is already
expensive. At its current price, JFC is already trading at 35.8X 2022E P/E, largely in line with
its 10-year historical median P/E of 36.3X.
FORECAST SUMMARY
Year to December 31 (Php Mil) 2018 2019 2020 2021E 2022E 2023E
Revenues 161,199 179,626 129,476 147,844 181,176 216,067
% change y/y 20.6% 11.4% -27.9% 14.2% 22.5% 19.3%
Gross profit 27,326 29,368 13,488 25,133 30,890 36,947
% change y/y 14.2% 7.5% -54.1% 86.3% 22.9% 19.6%
Gross margin (%) 17.0% 16.3% 10.4% 17.0% 17.1% 17.1%
EBITDA 13,749 17,171 1,209 19,321 23,518 27,845
% change y/y 20.4% 24.9% -93.0% 1498.6% 21.7% 18.4%
EBITDA margin (%) 8.5% 9.6% 0.9% 13.1% 13.0% 12.9%
Operating income 7,839 6,501 -12,626 5,692 9,059 12,640
% change y/y 17.5% -17.1% -294.2% NA 59.1% 39.5%
Operating margin (%) 4.9% 3.6% -9.8% 3.9% 5.0% 5.9%
Net Income 7,402 6,432 -11,495 2,751 6,299 9,158
% change y/y 4.1% -13.1% -278.7% NA 128.9% 45.4%
Net profit margin (%) 4.6% 3.6% -8.9% 1.9% 3.5% 4.2%
EPS (in Php) 6.81 5.89 -10.43 2.48 5.68 8.25
% change y/y 3.5% -13.5% -277.2% NA 128.7% 45.4%

RELATIVE VALUE
P/E(X) 29.9 34.5 NA 82.0 35.8 24.6
John Martin Luciano, CFA
P/BV(X) 4.7 4.2 5.8 5.8 5.2 4.6
ROE(%) 16.9% 12.9% -25.2% 7.1% 15.3% 19.9% Senior Research Analyst
Dividend Yield (%) 1.2% 1.3% 0.6% 0.4% 0.5% 1.1% john.luciano@colfinancial.com
so urce: JFC

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 COMPANY UPDATE I JFC: PROFITABLE DESPITE HEADWINDS FROM THE DELTA VARIANT

FRI 24 SEP 2021

International sales recovery to deteriorate in 3Q; but still

leads sales recovery

International sales recovery deteriorated in July and August amidst the spread of the more
transmissible delta variant in various countries. The company mentioned that Yonghe King
was affected by the stricter lockdown in August which caused China’s same store sales to
revert to negative territory. Likewise, the company highlighted that elevated COVID-19
cases in the Middle East and other Asian countries like Vietnam caused restrictions to
remain very strict. As a result, we believe temporary store closures remained elevated
during the third quarter.

Despite the headwinds, the company reiterated its plan to open 450 new stores this
year, bulk of which will be opened abroad due to the faster recovery of international
sales vs domestic sales. Note that international store sales in 2Q21 already reached pre-
pandemic level, while domestic same store sales still declined by 34% vs 2019 levels.
Overall, we expect the company’s international segment to continue driving its growth in
the near-term, particularly developed counties with higher vaccination rates.

Domestic sales recovery to weaken in 3Q; but stronger

recovery in 4Q

Similar with the international segment, domestic sales recovery weakened in August
after the government imposed another enhanced community quarantine (ECQ) in
Metro Manila. Recall that daily COVID-19 cases spiked amidst the spread of the more
transmissible delta variant. The reimposition of lockdown prohibited dine-in operations
which historically was the highest contributor to JFC’s sales. This likely resulted to more
temporary store closures during the third quarter.

Nevertheless, we expect fourth quarter recovery to improve as the government already

started easing restrictions in September. In particular, the government imposed a granular
lockdown in Metro Manila which allows for greater mobility compared to a region-wide
lockdown. While dine-in capacity remains low compared to GCQ levels at 10% capacity
for indoor dining limited to only fully vaccinated individuals and 30% capacity for al-
fresco dining, this will still benefit the company since it caters to a market that prefers
dining out.

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 COMPANY UPDATE I JFC: PROFITABLE DESPITE HEADWINDS FROM THE DELTA VARIANT

FRI 24 SEP 2021

Meanwhile, we expect the faster vaccination rollout to serve as one of the keys for the
recovery of domestic sales. Not only will this boost consumer confidence and business
confidence, but this will also drive economic recovery. Moreover, confidence in dining out
and foot traffic in malls will improve. This will also help keep hospital utilization rate low
even if cases may remain elevated. Note that 22.8Mil Filipinos or 20.7% of the population
already received the first dose while 18.5Mil Filipinos or 16.8% of the population already
received two doses. If the current 7-day average daily vaccination rate of 470,000 is
sustained, we estimate that the Philippines will vaccinate 70% of its population by May
2022 and 90% of the population by August 2022. In addition, we believe Metro Manila
will reach this level of inculcation faster considering that ~44% of its population is already
fully vaccinated. We believe the faster vaccination rollout in the Philippines will give the
government room to increase dining capacity once the daily COVID-19 cases decline and
hospital utilization rates improve.

Profitable despite headwinds from the delta variant

In our view, JFC will remain profitable despite headwinds from the delta variant. We expect
operating income and earnings this year to reach Php5.7Bil and Php2.8Bil, respectively.
This is on the back of the business transformation program implemented last year.
Recall that the company permanently closed 486 unprofitable stores worldwide and
four commissaries in the Philippines. Furthermore, headcount as well as operating and
general and administrative expenses were significantly reduced in stores, supply chain
facilities, and support group offices. In fact, while first half revenues were 15% lower vs
2019 levels, operating income was only 2% lower. This compares favorably vs other listed
restaurants. Although there is pressure on raw material cost due to higher commodity
prices, the company successfully implemented several price increases from 4Q20 to 2Q21
which should help temper the impact. Overall, we expect margins to further improve
once sales recovery resumes.

COL Financial Group, Inc. 3

 COMPANY UPDATE I JFC: PROFITABLE DESPITE HEADWINDS FROM THE DELTA VARIANT

FRI 24 SEP 2021

Strengthens off-premise capabilities

JFC continued to strengthen its delivery and take-out capabilities as it adapts to the
changing consumer behavior. All brands in the Philippines now have delivery websites.
Likewise, the company also launched mobile applications for Jollibee, Red Ribbon, Mang
Inasal, and Chowking. We believe these would reduce the company’s reliance on third-
party aggregators. The company also has other initiatives like Park, Order & Go and
curbside pickup. Overall, we expect off-premise sales to remain the bulk of sales in the
near-term as we believe consumers will still be cautious in dining out amidst the more
transmissible delta variant. At the same time, social distancing rules will likely keep dining
capacity lower vs pre-pandemic levels. Meanwhile, the company continues to partner
with aggregators as they are now present in Lalamove and MrSpeedy. This will further
expand the company’s reach. Note that the company’s in-house delivery riders are now
only deployed during peak demand hours. The company mentioned that it is cheaper
to outsource the riders to third party aggregators while retaining an in-house ordering
system.

To raise up to Php12Bil through preferred share offering

JFC plans to issue Php8Bil worth of preferred shares, with an oversubscription option of
Php4Bil. These shares are cumulative, nonvoting, non-participating, nonconvertible, and
redeemable. The issuance will have two sub-series, namely series A and B which will carry
dividend rates of 3.2821% and 4.2405%, respectively. Series A can be redeemed by the
company after three years, while series B can be redeemed after five years. The dividend
rates are higher compared to the 3-year and 5-year government bond rates at 2.4% and
2.8%, respectively. Assuming that the preferred shares are not redeemed, series A will
have a step-up rate based on the 7-year benchmark rate plus a spread of 4 percentage
points. Likewise, series B will have a step-up rate based on the 10-year benchmark rate
plus a spread of 4 percentage points.

The company will use the proceeds to partially buy back the US$600Mil bond issued
in January 2020 to refinance its short-term debt from the acquisition of CBTL. Part of
the proceeds from the preferred shares offering will also be used to fund its store and
commissary capex. Overall, we view this positively as this will enable the company to
restructure and spread its debt maturity as well as reduce its foreign exchange risks.

COL Financial Group, Inc. 4

 COMPANY UPDATE I JFC: PROFITABLE DESPITE HEADWINDS FROM THE DELTA VARIANT

FRI 24 SEP 2021

Maintain HOLD

We are increasing our FV estimate on JFC by 10% to Php220/sh after rolling over our
estimates to 2022. However, we are maintaining our HOLD rating given that the upside to
our target price is limited. While there are headwinds from the spread of the delta variant,
we believe the worst is over. We expect the company to remain profitable on the back of
the business transformation program implemented last year coupled with new initiatives
to strengthen off-premise sales. Moreover, domestic vaccination rate had also increased
amidst the steady availability of supply. We believe this will boost consumer confidence
and business confidence and spending. Nevertheless, valuation is already expensive. At
its current price, JFC is already trading at 35.8X 2022E P/E, largely in line with its 10-year
historical median P/E of 36.3X.

COL Financial Group, Inc. 5

 COMPANY UPDATE I JFC: PROFITABLE DESPITE HEADWINDS FROM THE DELTA VARIANT

FRI 24 SEP 2021

Jollibee Foods INCOME STATEMENT (IN PHPMIL)

Corporation (JFC)
2018 2019 2020 2021E 2022E 2023E
Revenues 161,199 179,626 129,476 147,844 181,176 216,067
% Growth 20.6% 11.4% -27.9% 14.2% 22.5% 19.3%
COMPANY BACKGROUND Gross Profit 27,326 29,368 13,488 25,133 30,890 36,947
% Growth 14.2% 7.5% -54.1% 86.3% 22.9% 19.6%
Jollibee Foods Corporation (JFC) is the
EBITDA 13,749 17,171 1,209 19,321 23,518 27,845
largest and leading quick service restaurant % Growth 20.4% 24.9% -93.0% 1498.6% 21.7% 18.4%
in the Philippines. It has around 2,645 Operating Profit 7,839 6,501 (12,626) 5,692 9,059 12,640
stores in the Philippines and 611 stores % Growth 17.5% -17.1% -294.2% NA 59.1% 39.5%
Interest Expense (2,076) (3,187) (3,757) (3,946) (3,614) (3,341)
abroad as of end-2016. Key brands of JFC
Other Income/Expense 3,476 6,170 2,794 2,653 2,669 2,911
include Jollibee, Chowking, Mang Inasal, Pretax Income 9,239 9,484 (13,590) 4,399 8,114 12,210
Greenwich, and Burger King, among others. Tax Expense 2,407 3,061 (1,030) 2,068 2,029 3,053
JFC also has substantial operations in China Net Income 7,402 6,432 (11,495) 2,751 6,299 9,158
% Growth 4.1% -13.1% -278.7% NA 128.9% 45.4%
through Yonghe King, in Vietnam through
EPS (Php) 6.8 5.9 (10.4) 2.5 5.7 8.3
Highlands Coffee, and in USA through % Growth 3.5% -13.5% -277.2% NA 128.9% 45.4%
Smashburger.
BALANCE SHEET (IN PHPMIL)
2018 2019 2020 2021E 2022E 2023E
SYSTEM WIDE SALES BREAKDOWN
Cash & Equivalents 24,169 23,022 21,811 8,309 6,310 8,088
Trade Receivables 4,863 5,906 7,069 4,438 5,440 6,489
Inventories 8,812 9,966 8,267 7,598 9,305 11,091
Other Current Assets 4,903 6,725 43,152 43,152 43,152 43,152
42.0%
PPE 26,535 32,592 28,780 33,799 38,141 41,922
Other Non-Current Assets 75,932 109,064 98,893 97,162 95,209 93,160
Total Assets 145,214 187,276 207,971 194,458 197,557 203,902
Accounts Payable 28,650 34,652 32,766 25,445 31,689 37,717
58.0%
Other Current Liabilities 5,992 33,028 27,407 29,836 27,995 26,776
LT Debts 21,372 19,180 43,167 38,107 34,896 32,784
Other Non-Current Liabilities 40,730 48,135 36,540 32,702 30,759 28,830
Total Liabilities 96,744 134,994 139,880 126,090 125,339 126,107
Total Equity 48,470 52,282 68,091 68,368 72,218 77,795
Domestic International Total Liabilities & Equity 145,214 187,276 207,971 194,458 197,557 203,902
BVPS 43.0 47.9 34.8 35.4 39.1 44.1

CASHFLOW STATEMENT (IN PHPMIL)

2018 2019 2020 2021E 2022E 2023E
Income (loss) before income tax 10,491 9,484 (13,590) 4,399 8,114 12,210
Depreciation & Amortization 5,910 10,670 14,085 13,629 14,459 15,205
Other Non-Cash Exp (Gains) 805 (400) 6,136 3,732 3,536 3,282
Interest income 361 369 189 214 79 59
Increase (decrease) in Working Cap (1,290) (4,475) (4,535) (4,022) 3,535 3,193
Income tax expense (2,782) (3,078) (1,752) (2,068) (2,029) (3,053)
Operating Cash Flow 13,494 12,569 535 15,885 27,694 30,897
Capex (9,521) (10,028) (5,877) (11,828) (11,776) (11,884)
Other Investments (4,454) (19,368) (34,034) (5,090) (5,071) (5,054)
Investing Cash Flow (13,975) (29,396) (39,911) (16,918) (16,848) (16,938)
Proceeds (Payment) Debts 5,602 (3,415) (3,030) (4,738) (5,041) (3,211)
Payment of Cash Dividends (2,667) (2,808) (1,430) (862) (1,043) (2,387)
Others (245) (819) (21,045) (6,869) (6,761) (6,582)
Financing Cash Flow 2,690 (7,042) (25,506) (12,470) (12,845) (12,181)
Effect of forex rates on cash (30) (122) (143) - - -
Change in Cash 2,178 -23,991 -65,025 -13,503 -1,999 1,778

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 COMPANY UPDATE I JFC: PROFITABLE DESPITE HEADWINDS FROM THE DELTA VARIANT

FRI 24 SEP 2021

INVESTMENT THESIS: KEY RATIOS

2018 2019 2020 2021E 2022E 2023E
Recovery from the impact of COVID-19
to continue GPM (%) 17.0% 16.3% 10.4% 17.0% 17.1% 17.1%
We are encouraged by JFC’s sequential EBITDA Margin (%) 8.5% 9.6% 0.9% 13.1% 13.0% 12.9%
improvement in sales, driven by its OPM (%) 4.9% 3.6% -9.8% 3.9% 5.0% 5.9%
international segment. We believe that this
will be the main driver of growth over the NPM (%) 4.6% 3.6% -8.9% 1.9% 3.5% 4.2%
next few years. Meanwhile, JFC’s domestic Times Interest Earned (X) 3.8 2.0 (3.4) 1.4 2.5 3.8
business, which accounted for ~58% of Current Ratio (X) 1.2 0.7 1.3 1.1 1.1 1.1
system-wide sales in 2020 will likely remain Net D/E Ratio (X) (0.1) (0.1) 0.3 0.4 0.4 0.3
weak given prevailing quarantine restriction
in the near-term. Nevertheless, we expect Days Receivable 11 12 19 12 12 12
fourth quarter recovery to improve as Days Inventory 21 23 29 23 23 23
the government already started easing Days Payable 72 76 108 76 76 76
restrictions in September. In particular,
Asset T/O (%) 137% 108% 66% 73% 92% 108%
the government imposed a granular
lockdown in Metro Manila which allows ROAE (%) 16.9% 12.9% -25.2% 7.1% 15.3% 19.9%
for greater mobility compared to a region-
wide lockdown. While dine-in capacity MAJOR CORPORATE DEVELOPMENTS (5-YEARS)
remains low compared to GCQ levels at
10% capacity for indoor dining limited to
only fully vaccinated individuals and 30% JFC announces plan to acquire Coffee Bean & Tea Leaf 07/24/2019
capacity for al-fresco dining, this will still
benefit the company since it caters to a
market that prefers dining out. JFC announces plan to increase stake in Smashburger to 85% from 40% 02/13/2018

Store expansion to resume in 2021 JFC increases first purchase option in Smashburger from 35% to 45% 03/14/2017
Management is planning to open ~450
gross new stores in 2021, bulk of which will
be opened abroad due to the faster recovery JFC announces its divestment of Chow Fun for US$1.6 Mil 01/15/2016
of international sales vs domestic sales. As
such, the company ramped up its planned
capex spending for the year at Php12.2Bil, JFC announces its divestment of San Pin Wang for RMB90 Mil 12/13/2016
of which Php4.7Bil is allocated for domestic
operations, while the remaining Php7.5Bil
is allotted for foreign expansion. Note that JFC acquires remaining 30% of Mang Inasal for Php2.0 Bil cash 04/22/2016
this is higher than the actual spending in
2019 and 2020 at Php10.0Bil and Php5.9Bil, JFC announces its acquisition of the remaining 30% in Food Manufacturing
02/24/2016
respectively. The continued store expansion China
should continue to drive JFC’s earnings in
the foreseeable future. JFC announces its acquisition of a 40% stake in Smashburger for US$99.5
10/13/2015
Mil
Profitable despite headwinds from the
delta variant
In our view, JFC will remain profitable despite
headwinds from the delta variant. We expect
operating income and earnings this year to
reach Php5.7Bil and Php2.8Bil, respectively.
This is on the back of the business
transformation program implemented last
year. Recall that the company permanently
closed 486 unprofitable stores worldwide
and four commissaries in the Philippines.
Furthermore, headcount as well as operating
and general and administrative expenses
were significantly reduced in stores, supply
chain facilities, and support group offices.
In fact, while first half revenues were 15%
lower vs 2019 levels, operating income was
only 2% lower. This compares favorably
vs other listed restaurants. Although there
is pressure on raw material cost due to
higher commodity prices, the company
successfully implemented several price
increases from 4Q20 to 2Q21 which should
help temper the impact. Overall, we expect
margins to further improve once sales
recovery resumes.

COL Financial Group, Inc. 7

 COMPANY UPDATE I JFC: PROFITABLE DESPITE HEADWINDS FROM THE DELTA VARIANT

FRI 24 SEP 2021

Valuation VALUATION ASSUMPTIONS

Methodology For DCF

Risk Premium 6.5%
Risk Free Rate 4.0%
Beta 1.00
Cost of Equity 10.5%
Cost of Debt 4.5%
Tax Rate 25.0%
WACC 7.7%
Terminal Growth Rate 3.0%

PV (2022E-2026E) 56,622
PV of Terminal Value 265,238
Enterprise value 321,860
Less: Net Debt 48,290
Less: Others 29,130
Equity Value 244,440
O/S 1,110
FV Estimate 220.00

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 COMPANY UPDATE I JFC: PROFITABLE DESPITE HEADWINDS FROM THE DELTA VARIANT

FRI 24 SEP 2021

I MP OR TA NT R AT ING DEFINITIONS
BUY
Stocks that have a BUY rating have attractive fundamentals and valuations based on our analysis. We expect the share price to outperform the market in the
next six to 12 months.

HOLD
Stocks that have a HOLD rating have either 1) attractive fundamentals but expensive valuations 2) attractive valuations but near-term earnings outlook might
be poor or vulnerable to numerous risks. Given the said factors, the share price of the stock may perform merely in line or underperform in the market in the
next six to twelve months.

SELL
We dislike both the valuations and fundamentals of stocks with a SELL rating. We expect the share price to underperform in the next six to12 months.

I MP OR TA NT DISC L AIM ER
Securities recommended, offered or sold by COL Financial Group, Inc. are subject to investment risks, including the possible loss of the principal amount invested.
Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and said information may
be incomplete or condensed. All opinions and estimates constitute the judgment of COL’s Equity Research Department as of the date of the report and are
subject to change without prior notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of
a security. COL Financial and/or its employees not involved in the preparation of this report may have investments in securities of derivatives of the companies
mentioned in this report and may trade them in ways different from those discussed in this report.

C O L R E S EAR C H T EAM

APRIL LYNN TAN, CFA

FIRST VICE PRESIDENT & CHIEF EQUITY STRATEGIST
april.tan@colfinancial.com

CHARLES WILLIAM ANG, CFA GEORGE CHING RICHARD LAÑEDA, CFA

HEAD OF RESEARCH SENIOR RESEARCH MANAGER SENIOR RESEARCH MANAGER
charles.ang@colfinancial.com george.ching@colfinancial.com richard.laneda@colfinancial.com

JOHN MARTIN LUCIANO, CFA FRANCES ROLFA NICOLAS JUSTIN RICHMOND CHENG
SENIOR RESEARCH ANALYST RESEARCH ANALYST SENIOR RESEARCH ANALYST
john.luciano@colfinancial.com rolfa.nicolas@colfinancial.com justin.cheng@colfinancial.com

ADRIAN ALEXANDER YU KERWIN MALCOLM CHAN

SENIOR RESEARCH ANALYST RESEARCH ANALYST
adrian.yu@colfinancial.com kerwin.chan@colfinancial.com

C O L F INANC IAL G R O UP, I NC.

24/F EAST TOWER, TEKTITE TOWERS,
EXCHANGE ROAD, ORTIGAS CENTER, PASIG CITY
PHILIPPINES 1605
TEL NO. +632 636-5411
FAX NO. +632 635-4632
WEBSITE: www.colfinancial.com

COL Financial Group, Inc. 9