Asia's fried-chicken king takes $2 bn hit in market value with US gamble

If 2019 was a bad year for Tony Tan Caktiong, the Philippine tycoon who built a fast-food empire that trounced McDonald’s in his home market, 2020 is shaping out to be worse for his company’s stock.

After wooing millions of Filipinos for decades with its signature fried chicken, Tan’s Jollibee Foods Corp. set out on an expansion in the U.S., spending $540 million buying Smashburger and Coffee Bean & Tea Leaf Co. Even as the two money-losing chains turn out to be a drag on earnings, the coronavirus is now threatening to hit its sales.

Fueled by concerns the spread of the disease will weigh on consumer spending, Jollibee shares have dived more than 18% this year, adding to losses in 2019, their worst in two decades. The slide has wiped $2.22 billion off the company’s market value since the end of 2018.
 

Long a bellwether for the Philippine consumer growth story, the headwinds have come as a reality check for Tan -- a son of poor Chinese immigrants -- who chased rapid growth abroad with acquisitions. Although that strategy helped widen the group’s footprint to almost 6,000 stores in 35 countries, investors have remained unimpressed by the pay-off as Smashburger and Coffee Bean continue to burn cash.

“The impact of the virus is not yet fully quantified,” said Noel Reyes, who helps manage 58 billion pesos ($1.15 billion) as chief investment officer at Security Bank Corp. in Manila. “Even if the drag from its acquisitions has plateaued, sentiment will remain bearish until we are certain that the impact of the virus has peaked.”

In China, the Jollibee group -- encompassing 15 brands -- operates 389 restaurants that account for 7.4% of its sales. The country, where the outbreak started, is one of the company’s major markets outside the Philippines and is home to 15% of its overseas outlets.

In Hubei, the epicenter of the outbreak, Jollibee has closed all of its 14 Yonghe King stores. Though the shut stores account for only about 1% of its sales, its remaining establishments are facing fewer footfalls and a dip in revenue. As part of containment measures, Chinese customers have been avoiding crowded places for safety reasons, and many provinces have banned banquets and group meals at restaurants.

Other restaurant firms that have been hit by the health crisis include Yum China Holdings Inc. and Haidilao International Holding Ltd., China’s largest hotpot chain.

Jollibee said Feb. 4 that it was too early to determine the impact of the virus on its business in China, but said it will press ahead with plans to have over 1,000 outlets there in the next few years. A representative for the company referred to that statement and declined to comment further.

Ice Cream Parlor

The origins of Jollibee date back to 1975, when Tan and his family opened an ice cream parlor in Quezon City. Later, the store started offering meals and sandwiches to customers on request, transforming into the first Jollibee restaurant in 1978.

Its rapid growth faced the first challenge in 1981, when McDonald’s Corp. entered the Southeast Asian country. The local firm managed to hold its own against the global giant, offering items tailored specifically for the Filipino palate.

With a menu that includes the unconventional sweet spaghetti with hot dog slices and the popular fried dish, Chickenjoy, Jollibee now controls about 56% of the $5 billion Philippine fast-food market.

The net worth of Tan and his family now is at least $1 billion.

Top Five

After branching out to other countries, including China, Tan pursued acquisitions in the U.S. The ambition was to become one of the world’s top five restaurant operators and cut dependence on the Philippines, President Ernesto Tanmantiong said in 2017.

Jollibee completed the $210-million purchase of Denver-based Smashburger in 2018, and paid $330 million for California-based Coffee Bean in 2019. The losses at Smashburger, attributed to poor store locations and inconsistent quality, were partly behind an almost 25% drop in Jollibee’s 2019 net income. Coffee Bean, expected to be unprofitable in the first nine months of 2020, was consolidated into Jollibee’s financial accounts last quarter.

In a bid to narrow losses at Smashburger, Jollibee is shutting unprofitable stores and opening new ones in locations with stronger traffic and visibility. Smashburger is expected to break even in 2021. At Coffee Bean, Jollibee is starting to address high administrative costs to reverse losses.

Those initiatives are winning some investors over. Julian Tarrobago, who manages $2.6 billion as head of equities at ATR Asset Management Inc. in Manila, said the measures will start bearing fruit later this year. The market is “under appreciating” the firm’s efforts to create wealth and a valuable brand, he added.

“There is value for Jollibee at these levels,” Tarrobago said. “I’d look at the long term than focus on the short-term noise.”

No Love

But right now, Jollibee is among the least-loved Philippine stocks. On a scale of 5, which represents unanimous buy, the average consensus analyst rating on the stock fell to 2.67 this year, the most bearish since May 2013. Jollibee’s rating hit 4.2 in 2018, a 14-year high.

Amid the bearish rating and continued selloff, Jollibee’s valuation shrank to 28 times 12-month estimated earnings, a discount to its 31.4 10-year average. The multiple sank to 28.2 in July, then a two-year low, as Coffee Bean’s purchase pummeled the stock.

The virus outbreak and consolidating Coffee Bean into its accounts could mute any gains from a recovery at Smashburger or Jollibee’s domestic operations, according to COL Financial Group Inc. analyst John Martin Luciano.

Progress in shrinking losses at Smashburger and Coffee Bean will set the direction for Jollibee, said Renzo Candano, an analyst at Daiwa Securities.

“Jollibee should be rightly valued at these price levels given what we know at this time,” Candano aid. “The stock will remain somewhat volatile because there are still a lot of operational risks. Not a lot of people are confident that first-quarter earnings will be really good.”