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Financial Adviser: 5 Things to Know About Jollibee's Preferred Shares Offering and How to Profit from It

Target listing date on October 14, 2021.
ILLUSTRATOR WARREN ESPEJO
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Jollibee Foods Corporation (PSE:JFC) is raising up to P12 billion by selling up to 12 million preferred shares at P1,000 each to the public.

The offering period of the preferred shares shall run from September 28 to October 4 with a target listing date on October 14, 2021.

What are preferred shares?

Preferred shares are a special class of stocks that have features of a debt instrument because of its fixed dividend payments. It offers a steady stream of dividends, similar to interest income, regardless of the company’s earnings.

But unlike debt, preferred dividends can be suspended in case of cash flow problems. Because of these risks, preferred dividend yields are always higher than the interest rates offered by debt securities.

Preferred shares are also less volatile than common shares due to its stable returns. Pricing of preferred shares is more dependent on interest rates than its company’s growth outlook.

A rising interest rate can lower the market value of preferred shares, but if interest rate declines, the value of preferred shares can go up.

In a market environment like this where yields are low due to falling interest rates, it may be a good investment strategy to diversify into preferred shares.

But before you invest, just make sure that the company is financially capable of paying its dividends on time. Just like buying an IPO, you should review the company’s profitability and financial performance.

Always ask yourself: what is the probability that the company will fulfill its promise to pay dividends consistently? Can it generate enough cash flow to cover the projected dividends aside from the existing interest expenses?

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Here are the five things you must know about the preferred share offering of Jollibee Food Corporation and how you can profit from it:

1| Know the structure of the offering

JFC is selling up to 12 million preferred shares in two series offering, Series A and Series B.

Series A preferred shares (PSE: JFCPA) will pay quarterly dividends at 3.2821 percent per annum, while Series B preferred shares (PSE: JFCPB) at 4.2405 percent.

JFCPA has a lower dividend rate because it has a shorter redemption period of three years, compared to JFCPB, which has a longer redemption of five years.

The redemption period, which works like the maturity date for bonds, mandates the company to buy back its preferred shares from its investors at the original offering price.

If, for any reason, JFC is not able to redeem the shares on the expected date, the company shall pay the prevailing market rate plus four percent on any of the subseries from there on.

Moreover, if the company fails to pay dividends on time, because the preferred shares are cumulative, such dividends shall be considered in arrears and must be paid before any other dividends.

2| Know the financial background of the company

JFC is the largest fast-food chain company in the Philippines with a network of more than 3,200 stores. It is also one of the largest in Asia operating in over 2,600 stores with 17 brands in 25 countries.

About 73 percent of JFC’s stores worldwide is dominated by its top five brands by store outlets: Jollibee, which comprises about 35 percent; Coffee Bean & Tea Leaf at 25 percent; Chowking at 14.6 percent, Mang Inasal at 14 percent and Highlands Coffee at 11.4 percent.

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Last year, due to the impact of the coronavirus pandemic, JFC registered a net loss of P12.6 billion from P7.5 billion net income in 2019 as its total net sales nosedived by 27 percent to P121.2 billion from P166.9 billion the previous year.

Higher operating fixed costs and interest expenses from its acquisition of Coffee Bean and Tea Leaf (CBTL) last year also added financial burden to JFC.

This year, with less lockdown restrictions and higher mobility, JFC’s bottom line for the first six months recovered to a net profit of P894 million from a net loss of P12.6 billion last year.

The recovery in net income, however, was not driven by large increase in net sales, which grew only by 13 percent to P66.4 billion from P58.8 billion last year, but by JFC’s effective cost-cutting measures.

Higher gross profit margins and lower operating expenses, which decreased by 16.8 percent from P11.1 billion last year to P9.2 billion this year helped JFC recover its operating income to P2.8 billion from a loss of P6.6 billion last year.

Despite this improvement, JFC’s interest expenses continued to swell from P628 million last year to P1.2 billion, eating up roughly half of its operating income.

JFC hopes to lower its interest expenses after it raises fresh capital from its preferred shares offering.

3| Know how the company will invest the proceeds

JFC plans to use the funding from the preferred share offering to pay off its debt obligations by buying back some its USD Perpetual Bonds through a cash tender offer.

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Last year, JFC, through its subsidiary Jollibee Worldwide Pte Ltd, issued  $300 million, 5.5-year and a $300 million, 10-year notes with a coupon rate of 4.125 percent and 4.750 percent, respectively, to pay off debt the company incurred to acquire CBTL.

These notes, known as a Perpetual Bonds, were listed in the Singapore Exchange Securities Trading Limited in June 2020.

JFC plans to use P8 billion of the planned P12 billion proceeds from the preferred share offering to redeem roughly one-third of its outstanding USD bonds overseas.

The projected buy back will partially lower JFC’s interest expenses as portions of its debt obligations are converted into preferred equity, but the financial burden on its cash flows will remain the same.

The balance of P4 billion from the projected proceeds, which will come from the oversubscription option, will be spent on capital expenditures.

JFC plans to invest the extra funds to build new commissaries in Visayas and Mindanao, as well as new store expansion.

4| Know the financial risk and opportunities

Despite JFC’s relatively high debt positions, the company has managed to stay liquid with a current ratio of 1.37 times, slightly better than its 1.35 ratio at the beginning of the year.

With the reopening of the economy, higher net sales from demand recovery and funding from the preferred share offering should further improve JFC’s short-term liquidity position.

But despite the company’s good working capital management, the risk of financial distress remains high as rising funding costs continue to put a strain on JFC’s operating cash flows.

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JFC’s interest coverage ratio has been declining in the past few years. From interest coverage of 4.32 in 2017, this ratio has fallen to 3.54 in 2018 and 2.04 in 2019.

An interest coverage ratio measures how many times a company can cover its current interest payments with its operating income.

The higher the coverage ratio, the safer the company is from future financial troubles.

Last year, because of JFC’s operating losses from the coronavirus pandemic, its interest coverage ratio went negative.

This year, with recovery in operating income to P2.8 billion for the first six months, JFC’s interest coverage ratio improved slightly to 1.59 times.

5| Know your investment strategy

There are two options that you can buy. If you want to apply a more conversative investment approach, you can choose JFCPA, which has h a shorter redemption period of three years that pays 3.2821 percent.

If you want a higher rate, you can choose the JFCPB that pays 4.2405 percent, which has redemption period of five years.

But the yields that JFC offers are comparatively low if we look at the average yields of 6.28 percent of listed preferred shares in the market.

Even if we compare the JFC preferred shares to the riskier, dividend-paying REIT stocks, it is still relatively low as the average yield of the REIT sector currently pays 6.0 percent.

It will be good to consider buying JFC preferred shares at lower price once it listed in the market.

To compute for the target price for each, we can simply get the dividend per share per year and divide it by the average yield. For example, for JFCPA, the dividend per year is P32.821.

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If we expect JFCPA to trade at 6.28 percent average to be attractive, the stock price must fall to P522.63 per share from offering price of P1,000 per share.

The same with JFCPB, at 6.28 percent target, we should expect stock price to fall to P675.2 per share.

Now, if we compare JFCPA to three-year Philippine bond yield, which has a rate of 2.423 percent, we can project the JFCPA at valuation of P742 per share given a two-percent risk premium.

For JFCPB, we can compare this to five-year Philippine bond yield, which currently has a 2.866 percent rate. With two percent risk premium, we can project JFCPB at valuation price of P871.45 per share.

 Henry Ong, RFP, is an entrepreneur, financial planning advocate and business advisor. Email Henry for business advice [email protected] or follow him on Twitter @henryong888 

 

 

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