Philippine Markets Newsletter

This global fast food chain continues to be a busy bee with its expansion strategies, reaching a Uniform ROA of 9%, not 3%

April 12, 2023

This company is not yet satisfied with being the largest fast food chain in the Philippines, as it continues to expand internationally. This global expansion has reached 16 other countries, boosting its brand recognition worldwide.

Despite that, as-reported metrics show the company might be growing too much without considering its profitability.

Also below, Uniform Accounting Embedded Expectations Analysis and the Uniform Accounting Performance and Valuation Tearsheet for the company.

Philippine Markets Newsletter:
Wednesday Uniform Earnings Tearsheets – Philippine-listed Focus
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Over the years, Jollibee Foods Corporation (JFC:PHL) has been dominating the Philippine market, outperforming global fast-food giants like McDonald’s and KFC. It has acquired or established partnerships with other food chains in the process such as Chowking, Greenwich, Red Ribbon, Coffee Bean & Tea Leaf, and Mang Inasal.

Aside from these local favorites, Jollibee has also acquired restaurants and fast food chains in 16 other countries over the past few decades, most notably in China and the United States. One of the company’s acquisitions in the United States, Smashburger, opened eight new stores in 2022.

Most recently, the company has also taken a 60% share of Jollibee stores in Hong Kong, which was previously a 100% franchised market. This was done in the hopes of elevating the brand in Hong Kong, a key market.

Despite the less-than-favorable macroeconomic conditions—such as high inflation rates and supply chain disruptions—experienced globally in 2022, Jollibee was able to report a net income of PHP 7.5 billion, a 26.4% increase from the previous year.

This was mostly a result of opening 542 new stores, a number that the company has never exceeded in its whole history, boosting revenue by 38%. Also, helping Jollibee achieve this growth and profitability was the reopening of the economy and the lifting of harsh pandemic restrictions in 2022.

CEO Ernesto Tanmantiong acknowledged the high possibility of similar macroeconomic headwinds in 2023, but remains confident that Jollibee will be resilient and continue to drive near-term growth to even higher levels.

As of February 2023, Jollibee has over 6,500 restaurants in the Philippines and overseas, with this number forecasted to break the 7,000 mark by the end of the year. Store expansion goals for 2023 have been set at 550-600 new stores in hopes of exceeding the newly set company record in 2022.

Looking at as-reported metrics, it appears that Jollibee is starting to get back to pre-pandemic levels of profitability in 2022 after two slow years, with return on assets (ROAs) recovering from a historical trough in the pandemic.

In reality, the company’s expansion strategy actually did better than presented, with Uniform ROAs reaching 9%.

One of the said distortions stems from how Philippine Financial Reporting Standards (PFRS) classifies interest expense.

According to PFRS, interest expense is an operating cash flow. In reality, interest expense represents the cost of debt and is rightfully a financing cash flow. As such, in Uniform Accounting, interest expense is added back to earnings.

For example, in 2022, Jollibee recognized an interest expense of PHP 4.8 billion, almost two-thirds of as-reported net income of PHP 7.6 billion. When we add the PHP 4.8 billion back to earnings, because it is not an operating expense, net income increases. This adjustment alone represents a 6.2% jump in Uniform earning power.

Cross-comparison against peers also becomes possible since the performance, expectations, and valuations of companies are now evaluated irrespective of the amount of leverage.

Jollibee’s earning power is stronger than you think

As-reported metrics distort the market’s perception of the firm’s recent profitability. If you were to just look at as-reported ROA, you would think that Jollibee’s profitability has been stronger than real economic metrics highlight.

Through Uniform Accounting, we can see that the company’s true ROAs have been mostly understated over the past decade. For example, as-reported ROA was 3% in 2022, but its Uniform ROA was actually higher at 9%.

Jollibee’s asset turns are more efficient than you think

Trends in Uniform ROA have been driven by trends in Uniform asset turns. For the past six years, as-reported metrics have understated Jollibee’s asset efficiency, a key driver of profitability.

Moreover, as-reported asset turnover has reached a peak of 1.2x since 2017. In comparison, Uniform turns have reached a peak of 3.4x over the same time period, making Jollibee appear to be a less efficient business than real economic metrics highlight.

SUMMARY and Jollibee Foods Corporation Tearsheet

As our Uniform Accounting tearsheet for Jollibee Foods Corporation (JFC:PHL) highlights, the company trades at a Uniform P/E of 36.6x, above the global corporate average of 18.4x but below its historical P/E of 59.1x.

High P/Es require high EPS growth to sustain them. In the case of Jollibee, the company has recently shown a 192% Uniform EPS shrinkage.

Sell-side analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, sell-side analysts’ near-term earnings forecasts tend to have relevant information.

We take sell-side forecasts for Philippine Financial Reporting Standards (PFRS) earnings and convert them to Uniform earnings forecasts. When we do this, Jollibee’s sell-side analyst-driven forecast is to see Uniform earnings growth of 165% and 55% in 2023 and 2024, respectively.

Based on current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Jollibee’s PHP 226.00 stock price. These are often referred to as market embedded expectations.

The company is currently being valued as if Uniform earnings were to grow by 27% per year over the next three years. What sell-side analysts expect for Jollibee’s earnings growth is well above what the current stock market valuation requires in 2023 and 2024.

Moreover, the company’s earning power is 2x the long-run corporate average. However, cash flows and cash on hand are below total obligations—including debt maturities, capex maintenance, and dividends. Together, this signals a moderate credit risk and a high dividend risk.

To conclude, Jollibee’s Uniform earnings growth is above its peer averages, and above its average peer valuations.

About the Philippine Markets Newsletter
“Wednesday Uniform Earnings Tearsheets – Philippine-listed Focus”

Some of the world’s greatest investors learned from the Father of Value Investing or have learned to follow his investment philosophy very closely. That pioneer of value investing is Professor Benjamin Graham. His followers:

Warren Buffett and Charles Munger of Berkshire Hathaway; Shelby C. Davis of Davis Funds; Marty Whitman of Third Avenue Value Fund; Jean-Marie Eveillard of First Eagle; Mitch Julis of Canyon Capital; just to name a few.

Each of these great investors studied security analysis and valuation, applying this methodology to manage their multi-billion dollar portfolios. They did this without relying on as-reported numbers.

Uniform Adjusted Financial Reporting Standards (UAFRS or Uniform Accounting) is an answer to the many inconsistencies present in GAAP and IFRS, as well as in PFRS.

Under IFRS, each company’s financial statements are rebuilt under a consistent set of rules, resulting in an apples-to-apples comparison. Resulting UAFRS-based earnings, assets, debts, cash flows from operations, investing, and financing, and other key elements become the basis for more reliable financial statement analysis.

Every Wednesday, we focus on one Philippine-listed company that’s particularly interesting from a UAFRS vs as-reported standpoint. We highlight one adjustment that illustrates why the as-reported numbers are unreliable.

This way, we gain a better understanding of the factors driving a particular stock’s returns, and whether or not the firm’s true profitability is reflected in its current valuations..

Hope you’ve found this week’s Uniform Earnings Tearsheet on a Philippine company interesting and insightful.

Stay tuned for next week’s Philippine company highlight!


Angelica Lim

Research Director
Philippine Markets Newsletter
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