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Jollibee Food Corporation (OTCPK:JBFCF) is a quick service restaurant (QSR) food chain that owns, franchises and manages a network of fast food restaurants. JFC's flagship brand is Jollibee, and it dominates the fast-food hamburger market in the Philippines with a 39% market share, outpacing main rival McDonald's' (NYSE:MCD) 15%. Its story of a local startup able to defeat a Goliath international conglomerate has become a case study for countless MBA programs around the world.

The Philippines' fast-food chain calls itself "A Triumph for and of the Filipino and a source of Filipino pride." Filipinos are proud of their home-grown brand which has nourished a strong national identity and has given Jollibee its competitive advantage. A strong national identity, along with its value pricing and localized taste, has contributed to its 10% 5-year CAGR of system-wide sales. Its founder, current chairman, CEO and president, Mr Tony Tan Caktiong, gained world recognition and put the Philippines on the map when he won the E&Y's World Entrepreneur of the Year Award in 2004. Mr Tan has built JFC from a small ice cream parlor, into the emerging global brand it is now, and owns about 60% of the company.

Jollibee's story isn't just limited to the Philippines. The company's footprint expands across Asia, the Middle East and the US. Jollibee's organic growth is strong. The company was able to tap into the brand loyalty of the 12 million Filipinos working overseas to expand internationally. Jollibee has opened stores in areas with significant Filipino populations such as New Jersey (~200,000) and Saudi Arabia (~1.1 million). Outside the Philippines, Vietnam has the next most number of Jollibee stores with 39 outlets. Opening Jollibee in places with large Filipino communities will continue, says Mr Tan: "We don't have to advertise when we open in these places. The longing for home is there. It's just packed. They come here because it's the taste of comfort food. When we opened a store in the Middle East, a customer asked me, 'Sir, can you play your old jingle? I want my daughter to hear it."

Jollibee's latest plan for expansion includes teaming up with hotelier Jennie Chua to find a home for the brand in Singapore. Ms Chua was the former CEO of Raffles hotel, one of Singapore's best known icons, and she will be steering Jollibee's foray into Singapore which is home to over 200,000 Filipinos. Being a new entrant into Singapore's already crowded foodservice industry of US$4 billion may be challenging. Jollibee expects to face stiff competition from McDonald's' 38% market share in Singapore and from KFC which is its second main competitor in Singapore with 17% market share. With Ms Chua at the helm Jollibee is all set to have a handful of stores opened by early 2013 which will help the brand establish itself as the fast food giant in Singapore as it is in the Philippines.

With its expansion into Singapore, Jollibee hopes to become a household name as the brand is not only favoured among Filipino overseas but the menu is also appreciated by many foreigners.

Brand

Segment

Number of stores and location

Jollibee

Hamburger QSR, value, Filipino

Philippines (780), US (27), SAME (65), Total (872)

Mang Inasal

Barbeque QSR, quality, value

Philippines (465)

Chowking

Chinese QSR

Philippines (386), US (19), SAME ( 25), Total (430)

Yonghe Kong

Chinese QSR

China (297)

Red Ribbon

Bakery, quality, premium

Philippines (212), US (32)

Total (244)

Greenwich

Pizza QSR, value

Philippine (202)

Highlands Coffee

Vietnamese coffee shop

Total (75)

Pho 24

Vietnamese noodle restaurant

Total (62)

Hong Zhuang Yuan

Chinese casual dining restaurant

China (46)

San Pin Wang

Beef noodle Chinese QSR

China (40)

Burger King

Hamburger QSR, premium

Philippines (29)

Hard Rock Cafe

Casual dining restaurant

Total (7)

Chow Fun

Asian fusion restaurant

US (3)

Note: South East Asia and Middle East (SAME)

Total: 2772

Source: Company's report (data as of 31 Dec 2012)

Jollibee's outlets accounted for 49% of the company's sales and that figure is slipping as the rest of its brand portfolio grows. JFC aims to be an international force to be reckoned with, and to do so, it has to foray into countries without a strong Filipino presence. In the recent few years, JFC has expanded aggressively into other countries, especially China where it buys already popular brands and work to improve their strength in the marketplace. The company has diversified its quick service restaurant business by acquiring several other brands across different categories over the years. According to a company press release, in 2012, the giant food service company inaugurated 200 new stores worldwide. To continue its expansion, JFC announced it will allot PHP5.5 billion (US$135.2mn) for 300 new stores across all its brands locally and internationally in 2013.

Some of JFC's new acquisitions have not worked out immediately. For instance, its investment in Superfoods, which holds brands such as Highland Coffee, Pho 24 and Hard Rock Café have posted a PHP72.5 million loss in 2012. JFC's China operation has generated US$192 million in revenue in 2011, and is its largest overseas market. But it is still not yet profitable. JFC has cut costs in China by rationalizing its headcount in its China corporate offices by shared services, and the benefits will be expected to show in 2013. A period of gestation is expected of JFC's new business. Even though they might not be immediately profitable, these new businesses plant the seed for future growth and will be expected to contribute to JFC's bottom line in time to come.

JFC currently has 78% of its sales coming from the Philippines. This is down from 92% in 2005. JFC is ambitious and has set its sights on becoming an international QSR force to be reckoned with, and aims to bring the share of domestic-international sales to 50-50. This means its international operations will have to grow faster than that of its Philippines operations, and might pose a challenge for the Philippines-based company. Growth in its domestic restaurant industry has been relatively robust, about 20% last year, and this will be expected to be sustained in 2013 as its population's income continues to grow. Nonetheless, as JFC continues to acquire businesses overseas, the long term trend of its declining domestic-international sales distribution will continue.

JFC has a profitable business, and its net income has a CAGR of 10%. The company generates a sizable amount of cash from operations, to a tune of PHP 7,782 million from total sales of PHP 71,048 million in 2012. JFC has stated that it will be expected to make future sizable acquisitions, and this cash would allow the company to do just that. One concern about JFC's financials would be its declining margins. JFC's operating margins are thin at 6.32% in 2012, from 7.16% in 2005. The company's international operations are not as profitable as its domestic ones, and as JFC continues aggressively overseas, margins might continue to decline. This will be expected to be mitigated to some extent by the rising peso which will help to keep costs down for imported raw materials such as beef and potatoes. Better efficiencies and cost savings will also be expected as the company's logistics centre in Paranaque started operations in 2012. Moving forward, more cost savings can still be realized through automation in the stores and as more food items are prepared in the commissaries.

From a valuation perspective, its trailing 12 months PER of ~30x seems quite a hefty sum to pay. However, one has to consider that JFC is a growth stock (sales and net income CAGR of 10%) and has always traded at a premium to its benchmark PSE Index. Furthermore, it has a dominant market position in the Philippines fast food industry, and its net income has only declined once over the past 10 years (by 2.8% in 2008 because of a spike in raw material costs). Its sizable domestic operations will allow investors to ride on the strong growth of the Philippines economy and rising income of the population. There is also the promise of contribution of earnings from its international operations which accounts for 22% of its revenues, especially from China, where it should turn profitable in the next couple of years. JFC has diversified both geographically and segmentally, overseas and into other segments of the restaurant business which should ensure its long-term growth prospects.

Source: Jollibee Foods: Buoyant Domestic Demand And Regional Expansion Drive Growth