Jollibee Foods: The Coffee And Tea Segment's Future Is Bright (Rating Upgrade)

seekingalpha10-05

Jollibee Foods' rating is upgraded to a Buy due to the positive financial prospects for its coffee & tea segment, which in turn supports the company's ambitious long-term financial targets.The coffee ...

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Dmitrii Maslov/iStock via Getty Images Jollibee Foods Corporation (OTCPK:JBFCF) (OTCPK:JBFCY) [JFC:PM] is now rated as a Buy, as opposed to a Hold previously. The outlook for JBFCF's coffee & tea segment is favorable, and this puts the company in a good position to meet its ambitious 2028 financial goals. This explains why I have turned bullish on Jollibee Foods. The previous April 19, 2024 article touched on Jollibee Foods' prospects in the company's domestic (the Philippines) and foreign markets. Readers should note that they can deal in Jollibee Foods's shares on the Over-The-Counter market and the Philippine Stock Exchange. Jollibee Foods' OTC shares have low trading liquidity. But the mean daily trading value for the company's Philippines-listed shares was reasonably high at $4 million as per S&P Capital IQ data. Investors can trade in Jollibee Foods' Philippines-listed shares with international brokerage firms like Singapore's OCBC Securities or Hong Kong's Monex Boom Securities. Ambitious Financial Targets Will Be Supported By The Growth Of Coffee & Tea Segment Jollibee Foods outlined in its investor presentation slides the company's goal to \"triple NIAT (Net Income After Tax) and grow ROIC (Return On Invested Capital) to 20% by 2028.\" As a comparison, the trailing twelve months' ROIC for JBFCF was approximately 9% based on S&P Capital IQ data. The stock should be able to command a higher valuation multiple, if the company can achieve a +25% earnings CAGR for the next five years (tripling of net profit) and more than double its ROIC in 2028 as per its targets. The growth of the \"coffee and tea segment through capital-light models\" and the achievement of \"20% ROIC in world's largest coffee and tea markets\" are highlighted as key earnings growth and ROIC improvement drivers for Jollibee Foods in its investor presentation slides. In my prior April 19, 2024 update, I stressed that the coffee & tea business is expected to \"account for about 40% of the company's new stores\" in FY 2024 and indicated that the coffee & tea business segment boasts the \"quickest payback\" (i.e. 2-3 years) among JBFCF's various businesses. As a reference, the company's coffee & tea segment accounted for around 14% of its total 1H 2024 EBITDA. Jollibee Foods' coffee & tea brands include Coffee Bean & Tea Leaf, Milksha, and Highlands Coffee. In other words, Jollibee Foods' coffee & tea segment has significant growth potential in terms of store openings and also boasts attractive financial return characteristics with its \"capital-light models\" and \"quick payback.\" As such, JBFCF is more likely to meet its FY 2028 financial goals if the company's coffee & tea segment is successful. In the subsequent sections of this article, I draw attention to Jollibee Foods' recent moves to grow its coffee & tea segment, which boosts the company's chances of achieving its ambitious financial targets. Compose Coffee Acquisition Will Boost JBFCF's Margins And ROIC At the beginning of Q3 2024, JBFCF issued an announcement disclosing the purchase of a 70% equity stake in a Korean coffee chain known as Compose Coffee. An Overview Of Compose Coffee  JBFCF's Compose Coffee Acquisition Briefing Presentation I have a favorable view of Jollibee Foods' acquisition of Compose Coffee, as this deal is aligned with JBFCF's goal of growing earnings and improving ROIC. With regards to the growth outlook, Compose Coffee is a leading coffee player in the attractive Korean market. In Jollibee Foods' Compose Coffee acquisition briefing presentation slides, JBFCF highlighted that South Korea is the world's third biggest coffee market, with the country's consumers spending an average of $208 per year per person on coffee last year. Compose Coffee is ranked third in South Korea in terms of the number of stores as of December 31, 2023 according to a February 29, 2024 Korea Economic Daily news report. Jollibee Foods' executives shared in a separate media interview published on QSR Media Asia that Compose Coffee boasts an 8% share of the Korean coffee market. In terms of financial returns, Compose Coffee's EBITDA and operating margins are 42% and 40%, respectively, as indicated in JBFCF's acquisition briefing presentation. In comparison, Jollibee Foods' actual trailing twelve months' EBITDA and EBIT margins were comparatively lower 9.5% and 6.4%, respectively. Also, all of Compose Coffee's outlets are franchised, which implies that the ROIC of this business should be reasonably high. For the near term, JBFCF has raised the mid-point of its full-year FY 2024 operating profit growth guidance from +12.5% to +19.0% taking into account Compose Coffee's financial contributions as revealed in its Q2 results presentation. In the mid-to-long term, the acquisition of the capital-light and highly profitable Compose Coffee will enhance Jollibee's overall profit margins and ROICs for the future, and help the company meet its 2028 financial goals. New Licensing Deal Allows Jollibee Foods' Milksha Business To Venture Into The US Last month, Jollibee Foods published an announcement revealing that it signed \"a license agreement\" to \"operate Milksha branded stores in California, New York, and Texas in the United States.\" This announcement also indicated that this deal allows JBFCF to explore \"franchising opportunities for other locations in the USA outside of the three states\" mentioned above. Milksha, a bubble tea chain, has the smallest EBITDA contribution among JBFCF's key coffee & tea brands. In the first half of this year, Jollibee Foods generated 1% of its EBITDA from Milksha. In contrast, Coffee Bean & Tea Leaf and Highlands Coffee contributed 7% and 6% of JBFCF's 1H 2024 EBITDA, respectively. These numbers were taken from the company's second quarter results presentation. It is easy to understand why Milksha's EBITDA contribution was modest in the past, when one looks at Milksha's geographical presence. On Milksha's website, it is indicated that this bubble tea chain is only operating in a handful of markets, namely Taiwan, Hong Kong, Singapore, Australia, the Philippines, and the UK. According to market research firm Grand View Research's projections, the bubble tea market in the US is forecasted to grow at a seven-year CAGR of +9.5% to over $1.7 billion at the end of the current decade. Therefore, it is realistic to think Milksha, one of the company's coffee & tea brands, has the potential to grow at a faster pace in the coming years with its venture into the US. It is also worth highlighting that Milksha is likely to be a high ROIC business, as more than 90% of its stores are franchised as per JBFCF's licensing deal announcement. Variant View The achievement of Jollibee Foods' 2028 financial targets is dependent on the success of the company's coffee & tea businesses to a significant extent. A bear-case scenario sees JBFCF facing post-deal integration issues with its acquisition of a majority equity interest in Compose Coffee. Another worst-case scenario has Jollibee Foods facing challenges in expanding the Milksha bubble tea brand in the US due to stiff competition or a failure to engage local consumers. Conclusion The market currently values Jollibee Foods at 10 times consensus next twelve months' EV/EBITDA, while the company's consensus FY 2024-2026 EBITDA CAGR is +13%. These metrics were sourced from S&P Capital IQ. A general rule of thumb is that a stock deserves to trade at an earnings multiple equivalent to its earnings growth rate. As such, I think that Jollibee Foods' EV/EBITDA multiple can re-rate to the low-to-mid teens level in the future. The key valuation re-rating catalyst for JBFCF will be the future ROIC improvement and earnings growth driven by its coffee & tea segment.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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