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Financial Adviser: 5 Reasons Why Jollibee’s Stock Lost 66% and How to Profit from It

It's likely that JFC will report more losses in the coming quarters.
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Jollibee Food Corp (PSE: JFC) recently announced that it incurred a net loss of P2.07 billion for the first quarter of this year, sending its share price skidding by as much as 18.2 percent last week.

It was the first time in the history of JFC to report a quarterly net loss since the company went public in 1993.

With the ongoing pandemic crisis still unresolved, it is likely that JFC will report more losses in the coming quarters this year as many of its outlets will remain closed.

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The stock of JFC has been declining for over a year already since it peaked at P322 per share last year to P109 last week, losing more than 66 percent so far to date.

Will the stock continue to fall this year? What are the causes of JFC’s financial problems and how will this affect the company’s share price valuation in the future?

Here are the five reasons why JFC is losing and when you can possibly pick up the stock for long-term investment:

1| Falling sales due to COVID-19 crisis

JFC reported that its total sales fell by 2.3 percent for the first three months of the year to P39.4 billion from P40.3 billion in the same period last year.

The decline was due to the impact of the coronavirus outbreak that began in late March when the government imposed a mandatory Luzon-wide lockdown.

About 70 percent of JFC’s domestic stores were closed during the two-month enhanced community quarantine in April, causing the company’s systemwide sales to decline by about 40 percent.

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JFC’s store outlets abroad were also temporarily closed due to the pandemic including in China, which closed six percent of its total stores; North America, 16 percent; Coffee Bean and Tea Leaf outlets, 32 percent; and Europe, Middle East, African region, 23 percent.

Because of this, JFC’s total revenues for the second quarter are expected to drop significantly with higher losses.

Although the government has started to ease down the lockdown restrictions this month, revenue recovery may be slow due to limited consumer traffic.

It will probably take some time before consumer confidence returns as there are still no vaccine resolutions to the crisis, not to mention the expected recession in the economy this year.

2| Rising fixed costs brought about by big ticket acquisitions

The recent acquisitions of JFC, particularly Coffee Bean and Tea Leaf (CBTL) have increased the company’s total fixed costs, raising its operating risks to unprecedented level.

JFC reported that its total operating fixed costs, including depreciation and communication expenses, have increased due to the addition of new stores and commissaries from acquisitions.

Higher fixed costs will mean higher operating risks for JFC. The average degree of operating leverage of JFC before it acquired CBTL was only about 0.06.

This means that for every P1.00 increase in revenues, only P0.06 is generated as operating income, which is quite conservative as most of its operating expenses were variable.

But in 2019, after consolidation of CBTL and Smashburger into JFC’s accounts, the degree of operating leverage has turned negative 0.15, which means that additional fixed costs from CBTL have dragged down the contribution margins of JFC’s other profitable units.

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This year, based on its first quarter results, JFC’s degree of operating leverage has increased to 3.75, which means that for every P1.00 loss in revenue, the impact on JFC’s operating income will be almost four times.

Given the higher fixed costs of the company, the expected decline in JFC’s revenues this year is expected to have a devastating effect on its operating income.

3| Declining gross profit margins from higher direct costs

JFC’s gross profit margins have been declining for the past six years, from 21.8 percent in 2014 to 19 percent in 2018 as it diversified its revenue base with more brands and higher store outlets overseas.

Last year, with the acquisition of CBTL, JFC’s gross profit further declined to 16.4 percent due to higher store and manufacturing costs.

This year, despite closures of most of JFC’s stores, gross profit margin fell to its lowest at only 10.2 percent.

The increase in costs mainly came from additional inventories, which increased from 46.9 percent of revenues in 2019 to 48 percent; salaries and wages, which increased to 12.3 percent from 10 percent; and depreciation and amortization charges, which increased from 7.9 percent to 8.2 percent.

Lower grow profit margins coupled with higher operating leverage will result to larger operating losses this year.

4| Higher financial burden from recent capital raising

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 distress.

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.

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This year, because of JFC’s operating losses from the first quarter, its interest expense of P759 million for three months simply added to the net loss.

But what is interesting here is that last year, JFC raised $600 million, or P30.4 billion through the issuance of a special bond called Senior Perpetual Securities.

JFC used a bulk of the proceeds from this offering to pay for the acquisition of CBTL last year. The perpetual securities, which were listed at Singapore Exchange Securities last January, pay an annual rate of 3.9 percent.

Because the perpetual securities were treated as equity rather than debt, the annual cost of this bond, which amounts to P1.2 billion per year, will not be booked as interest expense.

With falling operating income, rising funding costs will put a strain on JFC’s cash flows in the short-term.

5| Rising operating and financial risks lead to lower share price

JFC may look like a bargain at the current price after losing more than 18 percent last week, but if we are going to look at its pricing multiple, the stock still looks overvalued.

Prior to the release of its first quarter results, JFC was trading at a Price-to-Earnings (PE) ratio of 22 times based on the most recent 12 months earnings.

But after the disclosure of the losses last week, the 12-month trailing income has also adjusted, decreasing by 56 percent. This puts JFC’s current share price at a PE ratio of 45 times.

If we will use the same pricing multiple of 22 times at the adjusted income, the stock should be priced at P55.8 per share, which makes the current share price expensive.

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But in this kind of market environment, a PE multiple of 22 times may be considered relatively high given the expected losses of JFC in the first half of the year.

Lower PE ratio brought about by higher risks of losses may mean lower share price for JFC.

With the crisis still far from over, JFC’s growth outlook remains uncertain. It will be good to wait for the stock to fall further before picking it up for long-term investment.

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