FREE Stock in Focus: JFC (19 Aug 2019) by RCBC Securities
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Summary of Broker’s Recommendation
|BROKER||RECOMMENDATION||TARGET PRICE||ISSUED ON|
|RCBC Securities||HOLD||240.00||19 Aug 2019|
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Our Partner Broker’s Recommendation
We slashed our Target Price for JFC from PHP 319.60 to PHP 240.00 per share, applying the midway to 2018 average Price-Earnings (P/E) ratio at 40.9x to its 12-month forward EPS of 5.85. Expected composite return in the next 12 months, including a forecasted dividend yield of 1.3%, would be 3.3% at the previous close of PHP 235.20. This underperforms versus our expected PSEi return of 13.7% to 8,900, hence we recommend a HOLD.
Our Partner Broker’s Analysis
Net income below expectations
JFC’s 1st Half (1H) 2019 core net income was below our expectation based on our 2019 forecast of PHP 7.5 billion. For our full year forecast, we maintained the 2nd Quarter same-store sales growth (SSSG) of 3.3% for the rest of the year and kept our store rollout assumption at 359 stores, net of closures. We forecast operating income of PHP 6.0 billionn, down 23%, due to higher direct costs and operating expenses. We cut our 2019 core net income forecast to PHP 6.1 billion, 20% lower year-on-year (yoy).
For 2020, we assumed SSSG growth to 5% due to an anticipated recovery in Red Ribbon’s SSSG and improved local consumer sentiment, another 359 new JFC stores, and the normalization of Red Ribbon’s expenses without any further pre-operating expenses associated with the new plant.
Earnings drag from CBTL
However, we also pencilled in the potential earnings drag that will come from Coffee Bean and Tea Leaf (CBTL). For simplicity’s sake, we assumed consolidation of CBTL by January 1, 2020 and maintained CBTL’s 2018 US$21 million net loss for the year minus its interest expense of PHP 237 million, given that it will be acquired on a debt-free basis, but also estimated PHP 632 million in additional interest expense from a $350 million bridge loan that JFC will use to fund the acquisition.
Hence, we forecast 2020 core net income of PHP 6.6 billion for JFC, 8% higher year-on-year (yoy). Despite the forecasted yoy earnings growth, that won’t be enough to bring JFC’s net income back to its level in 2018. ROE-wise, the 2020 ratio would only be at 12.3% from 16.9% in 2018.
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