Financial Adviser: 5 Food Stocks to Watch in Post-COVID Recovery and How to Profit from Them

Food businesses are slowly recovering.
ILLUSTRATOR WARREN ESPEJO

The fast-food industry has suffered huge losses since the outbreak of coronavirus pandemic in 2020, resulting to closure of thousands of outlets in the country.

The government-imposed restrictions on mobility, as a result of mandatory lockdowns in the past two years, slowed down market demand from limited restaurant foot traffic and reduced operating hours.

This year, with the expected decline in COVID cases, hopes are high that the economy will slowly return to normalcy, as mobility restrictions are relaxed.

Although consumer spending habits may have changed since the start of the pandemic, restaurant consumption, particularly fast-food, should continue to thrive in the new normal.

The Philippine Stock Exchange index has recovered with year-to-date gain of 2.0 percent so far this year, but the food and beverage sector has yet to catch up, as the food sector index is still down by 1.2 percent.

With the gradual reopening of the economy, fast-food consumption should slowly recover in the coming months, especially with the onset of the election campaign season.

Here are the five fast-food stocks to watch out for this year and how you can profit from it:

1| Jollibee Foods Corporation

Jollibee Foods Corporation (PSE: 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 2,700 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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During the 2020 coronavirus pandemic, JFC suffered 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 P129 billion from P176 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.

But last year, with less lockdown restrictions and higher mobility, JFC’s total sales recovered by 18.7 percent to P153.5 billion.

Although total sales were still lower than its pre-pandemic level, the recovery helped JFC get back in the black with net income of P5.5 billion from loss of P12.6 billion.

JFC’s return to profitability translates its 12-month trailing Price-to-Earnings (PE) ratio to 48 times, but given a recovery momentum, a higher share price may be justified by a lower prospective PE ratio.

Let’s say JFC’s total sales this year will return to its 2019 sales level at P179 billion, we can expect the company to achieve a conservative net income of P7.3 billion, representing 32.7 percent earnings growth.

At this projected income, which gives JFC a prospective PE of 32.6 times, the PE to Growth ratio of the stock will just be 1.0.

If we will price the stock based on its average Price-to-Growth ratio before pandemic at 2.32 times, JFC’s stock price could possibly double over the long-term provided strong support from its earnings growth.

2| Max’s Group, Inc.

Max’s Group, Inc (PSE: MAXS) is one of the largest food chain operators in the country with a store network of over 650 outlets dominated by its homegrown brands such as Max’s Restaurant, Pancake House and Yellow Cab Pizza,

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During the 2020 pandemic, MAXS suffered net loss of P1.7 billion from net income of P724 million in 2019 as its total revenues fell by 50.4 percent to P7.1 billion from P14.4 billion from the previous year.

Last year, MAXS restructured its operations and increased its total sales toward the end of September to P5.3 billion, three percent higher than the P5.1 billion sales in the same period last year.

The minimal sales growth hardly helped MAXS to return to profitability, but the company was able to book a one-time gain of P713 million from sale of subsidiary to complete the first nine months of 2021 with a net income of P234 million.

MAXS will need to bring its total sales back to P12 billion level to generate positive operating income this year.

Early indications from its third quarter performance last year showed its sales have started to recover by 23.5 percent. It is expected that total sales during the last quarter would have improved further.

With the reopening of the economy this year, MAXS should be able to recover strongly. At a conservative estimate of P12 billion in sales, assuming net profit margin of four percent, we can estimate MAXS’ net income to reach P480 million.

At this target income against current market capitalization, MAXS will have a prospective PE ratio of 14.5 times, which is 36 percent lower than its pre-pandemic PE average of 22.6 times.

3| Shakey’s Pizza Asia Ventures, Inc.

Shakey’s Pizza Asia Ventures (PSE: PIZZA) is the largest operator of full-service pizza chain in the Philippines, with the Shakey’s brand dominating 67 percent of the market.

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PIZZA has been building its portfolio of brands during the past three years. Just months before the coronavirus outbreak, PIZZA acquired the fast-growing specialty chicken restaurant, Peri Peri Charcoal Chicken.

PIZZA also acquired the master franchise agreement of R&B milk tea brand, a leading milk tea and bubble tea player in Singapore with more than 1,000 outlets worldwide, from Singapore-based Koufu Group in 2020.

Just recently, PIZZA also acquired flavored-fries food kiosk chain, Potato Corner, which has a store network of over 1,000 outlets both here and abroad.

During 2020 pandemic, PIZZA suffered a net loss of P253 million from net income of P865 million in 2019, as its total sales declined by 36 percent to P5.3 billion from P8.2 billion from the previous year.

Last year, capacity restrictions on outdoor and indoor dining continued to affect foot traffic. PIZZA’s nine-month total sales struggled with a two percent decline from P3.67 billion in 2020 to P3.58 billion.

But amidst the pandemic challenges, PIZZA managed to lower its net loss from P461 million in 2020 to only P35.2 million due to higher gross margin and lower operating expenses.

PIZZA expects to end the year 2021 with a positive bottom line on the back of a strong fourth quarter holiday season sales.

This year, with improving restrictions on capacity and increasing consumer mobility, PIZZA is poised for a strong recovery as it capitalizes on its newly acquired brands to expand its store network.

Assuming PIZZA returns to its pre-pandemic 2019 total sales of P8.2 billion this year, we can estimate that its net income to conservatively amount to P865 million.

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At this projected net income, PIZZA will have a prospective PE ratio of 17.2 times, which is 21.8 percent cheaper than its pre-pandemic average PE ratio of 22 times.

4| Fruitas Holdings, Inc.

Fruitas Holdings, Inc (PSE: FRUIT) is the largest food and beverage kiosk operator in the country with over 1,000 stores composed of its market-leading brands such as Fruitas, Jamaican Pattie, Johnn Lemon, and Sabroso Lechon.

FRUIT raised P1.0 billion through an initial public offering just a few months before the outbreak of the pandemic in 2020.

During that year, FRUIT suffered a net loss of P48 million from net income of P120 million in 2019, as total sales declined by 54 percent to P891 million that year from P1.9 billion the previous year.

Armed with fresh capital, FRUIT pivoted its expansion outside the mall space during the lockdown period by establishing community stores such as Babot’s Farm and Soy and Bean stores, which quickly grew to 69 stores to date.

Last year, FRUIT also acquired homegrown brand Balai Pandesal and expanded it to 21 stores today.

Despite the resurgence of COVID cases last year and reimposition of mandatory lockdown, FRUIT was able to halve its nine-month net loss to P16 million in 2021 from P32 million loss in the same period the previous year, as total sales improved by 22.7 percent to P771 million from P628 million in 2020.

This year, with the reopening of the economy, FRUIT is poised to benefit strong sales recovery not only from its mall-based kiosk outlets, but also from its community stores.

Assuming a conservative daily sale of P12,000 per day, FRUIT’s community stores should deliver at least P390 million for this year, contributing roughly about 20 percent of its pre-pandemic sales of P1.94 billion in 2019.

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If we assume FRUIT’s total sales to recover 70 percent of its pre-pandemic sales in 2019 this year at P1.4 billion from its existing outlets and we add the new sales generated from its expansion of P390 million, we can derive total sales target of P1.8 billion.

Using historical net profit margin of 6.5 percent, we can estimate FRUIT’s target net income for this year at P117 million. Given FRUIT’s market capitalization at P2.68 billion, we can estimate FRUIT’s prospective PE ratio of 22.9 times.

FRUIT’s continued expansion of its outlets this year should enable it to grow its net income by more than 30 percent per year, which translates to low PE-to-Growth ratio.

5| Figaro Coffee Group, Inc.

Figaro Coffee Group (PSE: FCG) is a fast-growing retail food operator of home-grown brands such as Figaro Coffee, Angel’s Pizza, Tien Ma, TFG Express, and Café Portofino, which has a total of 99 company-owned and franchised outlets to date.

More than half of FCG’s total outlets, about 53 in total, are franchised while 46 outlets are company-owned.

Although FCG, by its name, may be known as a coffee company because of its coffee chain brand, Figaro Coffee, the company owns only 20 outlets while 35 outlets are franchised.

FCG is primarily a pizza company due to the aggressive growth of its brand, Angel’s Pizza, which has grown from 12 outlets in 2018 to a total of 35 outlets this year.

Unlike all the food chain operators in the list, which all suffered significant losses during the pandemic, FCG’s total net income grew by 49.9 percent in 2020 at P72.7 million from P48 million in 2019, and 167 percent in 2021 at P194 million.

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FCG attributed the steady increase of its net income from the surge in delivery sales of Angel’s Pizza, which contributed roughly about 90 percent of its total sales in 2021.

FCG, which raised P767 million from its initial public offering last month, intends to expand its store network to 150 by end of 2022.

Assuming total sales of FCG’s existing outlets continue to grow by 25 percent in 2022 with the reopening of the economy plus the expansion of 12 more Angel’s Pizza outlets, total sales should increase further by 46 percent to P1.9 billion.

At P1.9 billion sales with historical net profit margin of 14.6 percent, FCG should further increase its net income by 146 percent to P284 million by end of 2022.

At this projected net income, FCG’s prospective PE ratio at current share price is 13 times, which is relatively lower than the fast food sector’s average of 21 times.

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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