Jollibee’s international push may hurt stock’s premium valuation

Jollibee Foods Corp., one of the most expensive Philippine stocks, could see its premium valuation deteriorate as the Manila-based restaurant operator pursues overseas expansion to cut its reliance at home.

Jollibee’s push abroad will dilute its Philippine story that persuaded many investors to pay a premium for the stock, according to analysts including Andy dela Cruz and Rachelle Cruz at COL Financial Group Inc. and AP Securities Inc. The company, the most expensive in the Philippine Stock Exchange Index after Universal Robina Corp., is moving closer to its goal of getting half its sales from abroad with its purchase of Coffee Bean & Tea Leaf.

Jollibee, which started as an ice cream parlor in 1975, has beaten McDonald’s Corp. in the Philippines, one of the few markets the U.S. fast-food giant has failed to dominate. Coffee Bean will raise the overseas component of Jollibee’s sales to 36% from 20% in 2018, according to the company, which has a presence in 18 markets outside the Philippines through a mix of homegrown brands and overseas acquisitions.

“This could trigger a downward re-rating for the stock,” AP Securities’Cruz said. “Its aggressive push outside could be a signal its home market is getting saturated. And if you valued Jollibee for its Philippine focus, would you still give it the same value with its growing overseas business?”

Investors may already be having a change of mind in tolerating a steep valuation for Jollibee. After the stock sank 8% to a nine-month low on Wednesday following the purchase’s announcement, the shares fell as much as 4.8% Thursday. The sell-off sank the stock’s multiple to 28.99 times its 12-month estimated earnings, the lowest since March 2017 and a discount to its 34.75 three-year average. The benchmark stock index has a 16.42 multiple.

With $21 million in losses in 2018, analysts said Coffee Bean will be a drag for Jollibee, which booked a 15% drop in first-quarter earnings, its first decline in profit since fourth quarter 2015 due to losses at Smashburger, a U.S. fast-food joint it took over in 2018.

“Investors liked Jollibee because of its concentrated business in the Philippines, so there is a risk it could lose part of that premium valuation with its overseas push,” COL Financial’s dela Cruz said. “But if they are able to turn around both Smashburger and Coffee Bean then the market might give back that valuation.”

Luis Limlingan, head of sales at Regina Capital Development Corp., said Jollibee could need far longer than the usual three years it takes to revitalize its acquired businesses as it juggles both Smashburger and Coffee Bean. “Jollibee will take on one of its most ambitious acquisition maneuvers to date,” he said.

Bloomberg