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Shakeys Pizza Asia Ventures, Inc.

THU 09 NOV 2017

Recurring profits up 15.4% to Php519 Mil


in 9M17, in line with COL and consensus
3Q17 Recurring profits up 33.3% y/y to Php132 Mil. PIZZAs net income in 3Q17 surged by
127.6% y/y to Php132 Mil. However, excluding one-time costs and gains related to the firms
restructuring and its initial public offering in 2016, recurring profits rose by 33.3% y/y to Php132
BUY
Mil. Growth was driven by better operating expense management which led to a 320 bps y/y
improvement in its operating profit margin to 14.1%. Revenues for the quarter also grew by TICKER: PIZZA
10.9% y/y driven by its five new store additions and 1.0% same store sales growth (SSSG). FAIR VALUE: 16.30
CURRENT PRICE: 13.00
PIZZAs third quarter performance brought its recurring net income for the first nine months of
2017 to Php519 Mil, up 15.4% from 9M16s recurring net income of Php449 Mil. This is in line with UPSIDE: 25.38
COL (69.3% of full year forecast) and consensus (66.9% of full-year) forecasts. Note that PIZZAs
fourth quarter profits usually account for around 30% of full-year results. Earnings growth was
driven by a 17.7% y/y increase in revenues to Php5.0 Bil. Moreover, operating expenses declined SHARE PRICE MOVEMENT
by 5.8% y/y to Php645 Mil, resulting to the expansion of its OPM by 210 bps y/y to 16.4%. This
allowed operating income to jump by 35.3% y/y to Php820 Mil. 110

Revenues up 10.9% to Php1.6 Bil on back of store openings and positive SSSG. As discussed
earlier, PIZZAs revenues rose by 10.9% y/y to Php1.6 Bil in 3Q17. Growth was driven by the 100
opening of five new stores and SSSG of 1% in the same period (lower SSSG due to price increase
implemented in 3Q16). This brought 9M17 revenues to Php5.0 Bil, up by 17.7% and in line with
COL and consensus forecasts at 71.6% and 72.1% of full-year estimates, respectively. Although 90
PIZZAs 1% SSSG looks disappointing, this is still in line with our forecast as we expect SSSG for
the full year to end at 4.0%. For 9M17, PIZZAs SSSG stood at 6%. It was also able to add a total
of 16 new stores during 9M17 and is on track to beat its 20 store addition guidance this 2017. 80
9-Aug-17 9-Sep-17 9-Oct-17 9-Nov-17
Maintain BUY. We are maintaining our BUY rating on PIZZA with a fair value estimate of PIZZA PSEi
Php16.30/sh. At its current price of Php12.98/sh, PIZZA is trading at 23.4X 18E P/E, a discount
to the average P/E of domestic and global peers of around 27.0X to 29.0X We think that PIZZA
deserves to trade at least in line with its domestic and global peers given its similarly attractive
outlook. Note that we forecast a 13.6% EPS growth in 2018, broadly in line with its peers median ABSOLUTE PERFORMANCE
EPS growth of 15%.
1M 3M YTD
FORECAST SUMMARY
PIZZA -2.26 3.17 13.04
Year to December 31 (Php Mil) 2014 2015 2016 2017E 2018E 2019E
Revenues 4,697 5,244 5,946 6,971 7,958 8,903
PSEi 2.16 7.04 24.96
% change y/y 13.1 11.7 13.4 17.2 14.2 11.9
Gross profit 1,058 1,196 1,787 2,069 2,326 2,575
% change y/y 15.8 13.0 49.4 15.8 12.4 10.7
Gross margin (%) 22.5 22.8 30.1 29.7 29.2 28.9
MARKET DATA
EBITDA 695 864 1,197 1,394 1,564 1,736 Market Cap 19,907.17Mil
% change y/y 15.5 24.4 38.5 16.4 12.2 11.0
EBITDA margin (%) 14.8 16.5 20.1 20.0 19.6 19.5
Outstanding Shares 1,531.32Mil
Operating income 531 613 802 1,217 1,357 1,500 52 Wk Range 10.90 - 14.80
% change y/y 17.2 15.6 30.8 51.7 11.5 10.5 3Mo Ave Daily T/O 12.16Mil
Operating margin (%) 11.3 11.7 13.5 17.5 17.1 16.8
Net Income 429 480 759 749 851 954
% change y/y 16.9 11.7 58.3 -1.3 13.6 12.2
Net profit margin (%) 9.1 9.1 12.8 10.7 10.7 10.7
EPS (in Php) 1.16 0.62 0.88 0.49 0.56 0.62
% change y/y 16.0 -46.6 41.9 -44.4 13.6 12.2

RELATIVE VALUE
P/E(X) 11.2 20.9 14.8 26.5 23.4 20.8
P/BV(X) 3.8 6.3 3.3 5.1 4.3 3.7 ANDY DELA CRUZ
ROE(%) 30.2 19.4 20.8 17.5 17.0 16.4 RESEARCH ANALYST
Dividend Yield (%) 2.8 1.5 9.9 0.9 0.9 1.0 andy.delacruz@colfinancial.com
so urce: P IZZA

Disclaimer: All content provided in COL Reports are meant to be read in the COL Financial website. Accuracy and completeness of content cannot be guaranteed if reports are viewed outside of
the COL Financial website as these may be subject to tampering or unauthorized alterations.
EARNINGS ANALYSIS I PIZZA: RECURRING PROFITS UP 15.4% TO PHP519 MIL IN 9M17, IN LINE WITH COL AND
CONSENSUS

THU 09 NOV 2017

3Q17 Recurring profits up 33.3% y/y to Php132 Mil

PIZZAs net income in 3Q17 surged by 127.6% y/y to Php132 Mil. However, excluding one-
time costs and gains related to the firms restructuring and its initial public offering in 2016,
recurring profits rose by 33.3% y/y to Php132 Mil. Growth was driven by better operating
expense management which led to a 320 bps y/y improvement in its operating profit margin
to 14.1%. Revenues for the quarter also grew by 10.9% y/y driven by its five new store additions
and 1.0% same store sales growth (SSSG).

PIZZAs third quarter performance brought its recurring net income for the first nine months
of 2017 to Php519 Mil, up 15.4% from 9M16s recurring net income of Php449 Mil. This is in
line with COL (69.3% of full year forecast) and consensus (66.9% of full-year) forecasts. Note
that PIZZAs fourth quarter profits usually account for around 30% of full-year results. Earnings
growth was driven by a 17.7% y/y increase in revenues to Php5.0 Bil. Moreover, operating
expenses declined by 5.8% y/y to Php645 Mil, resulting to the expansion of its OPM by 210 bps
y/y to 16.4%. This allowed operating income to jump by 35.3% y/y to Php820 Mil.

Exhibit 1: Results summary


% of
in Php Mil 3Q16 3Q17 % Change 9M16 9M17 % Change COL Consensus
Net revenues 1,456 1,615 10.9 4,240 4,992 17.7 71.6 72.1
Gross profit 484 449 -7.2 1,290 1,465 13.6 70.8 70.0
Gross margin (%) 33.2 27.8 - 30.4 29.3 - - -
Core EBITDA 158 270 70.9 768 967 25.9 69.4 71.6
EBITDA margin (%) 10.9 16.7 - 18.1 19.4 - - -
Operating income 158 227 43.7 606 820 35.3 67.4 69.0
Operating margin (%) 10.9 14.1 - 14.3 16.4 - - -
Net income 58 132 127.6 424 504 18.9 67.3 65.0
Net margin (%) 4.0 8.2 - 10.0 10.1 - - -
Core income 99 132 33.3 449 519 15.6 69.3 66.9
Core margin (%) 6.8 8.2 - 10.6 10.4 - - -
Source: PIZZA, Bloomberg

Revenues up 10.9% to Php1.6 Bil on back of store openings and


positive SSSG

As discussed earlier, PIZZAs revenues rose by 10.9% y/y to Php1.6 Bil in 3Q17. Growth was
driven by the opening of five new stores and SSSG of 1% in the same period (lower SSSG
due to price increase implemented in 3Q16). This brought 9M17 revenues to Php5.0 Bil, up by
17.7% and in line with COL and consensus forecasts at 71.6% and 72.1% of full-year estimates,
respectively. Although PIZZAs 1% SSSG looks disappointing, this is still in line with our forecast
as we expect SSSG for the full year to end at 4.0%. For 9M17, PIZZAs SSSG stood at 6%. It
was also able to add a total of 16 new stores during 9M17 and is on track to beat its 20 store
addition guidance this 2017.

COL Financial Group, Inc. 2


EARNINGS ANALYSIS I PIZZA: RECURRING PROFITS UP 15.4% TO PHP519 MIL IN 9M17, IN LINE WITH COL AND
CONSENSUS

THU 09 NOV 2017

GPM pressured by rise in input costs but was more than offset
by opex management

PIZZAs GPM in 3Q17 declined by around 540 bps y/y to 27.8% due to the rise in its input costs.
Moreover, 3Q16 was a tough comparable given unusually low cheese prices in the period,
among others. Still, price increases and purchasing synergies with Century Pacific Group
helped protect its GPM from declining further impact. Its GPM for 9M17 likewise declined
albeit at a slower pace of 110 bps y/y to 29.3%.

On the positive side, PIZZAs operating expense declined by around 5.8% y/y in 9M17 as it was
able to manage its operating expenses. Consequently, even with the drop in GPM, OPM in
9M17 still increased by 210 bps to 16.4% and in turn led to a 35.3% y/y increase in operating
profits to Php820 Mil.

Maintain BUY

We are maintaining our BUY rating on PIZZA with a fair value estimate of Php16.30/sh. At its
current price of Php12.98/sh, PIZZA is trading at 23.4X 18E P/E, a discount to the average P/E of
domestic and global peers of around 27.0X to 29.0X We think that PIZZA deserves to trade at
least in line with its domestic and global peers given its similarly attractive outlook. Note that
we forecast a 13.6% EPS growth in 2018, broadly in line with its peers median EPS growth of
15%.

COL Financial Group, Inc. 3


EARNINGS ANALYSIS I PIZZA: RECURRING PROFITS UP 15.4% TO PHP519 MIL IN 9M17, IN LINE WITH COL AND
CONSENSUS

THU 09 NOV 2017

Shakeys Pizza Asia INCOME STATEMENT (IN PHPMIL)

Ventures, Inc. (PIZZA) Revenues


FY14
4,697
FY15
5,244
FY16
5,946
FY17E
6,971
FY18E
7,958
FY19E
8,903
% Growth - 11.7% 13.4% 17.2% 14.2% 11.9%
COMPANY BACKGROUND Gross Profit 1,058 1,196 1,787 2,069 2,326 2,575
Shakeys Pizza Asia Ventures Inc. (PIZZA) is % Growth - 13.0% 49.4% 15.8% 12.4% 10.7%
EBITDA 695 864 1,197 1,394 1,564 1,736
currently the largest chained pizza brand
% Growth - 24.4% 38.5% 16.4% 12.2% 11.0%
in the Philippines, outperforming several Operating Profit 531 613 802 1,217 1,357 1,500
large brands such as Greenwich and Pizza % Growth 0.0% 15.6% 30.8% 51.7% 11.5% 10.5%
Hut in terms of sales value, garnering a Interest Expense - - (128.5) (177.0) (175.9) (174.7)
dominant market share of 32.2% in 2015. Other Income/Expense 50 46 262 - - -
After first opening its doors in the Philippines Pretax Income 581 659 936 1,040 1,182 1,325
Tax Expense 152 179 177 291 331 371
in 1975, Shakeys as of 2016 has a total of
Net Income 429 480 759 749 851 954
184 restaurants nationwide, 74 of which are
% Growth 0.0% 11.7% 58.3% -1.3% 13.6% 12.2%
franchised stores. EPS (Php) 1.16 0.62 0.88 0.49 0.56 0.62
% Growth - -46.6% 41.9% -44.4% 13.6% 12.2%
SALES CHANNEL MIX
BALANCE SHEET (IN PHPMIL)
FY14 FY15 FY16 FY17E FY18E FY19E
Cash & Equivalents 406 389 329 323 769 1,298
18.6% Trade Receivables 400 543 421 553 632 707
18.6% Inventories 255 239 256 269 309 347
Other Current Assets 82 70 1,138 13 13 13
PPE 440 577 999 1,560 1,785 2,006
54.0% Other Non-Current Assets 839 846 6,241 6,241 6,241 6,241
54.0% Total Assets 2,423 2,664 9,384 8,959 9,749 10,612
27.4%
27.4% Accounts Payable 1,038 908 864 913 1,049 1,179
Other Current Liabilities 50 58 1,113 89 89 1,089
LT Debts - - 3,933 3,908 3,883 2,858
Other Non-Current Liabilities 70 120 115 115 115 115
Total Liabilities 1,158 1,086 6,025 5,026 5,137 5,242
Dine-in Delivery Others Total Equity 1,265 1,578 3,359 3,933 4,612 5,370
Dine-in Delivery Others
Total Liabilities & Equity 2,423 2,664 9,384 8,959 9,749 10,612
BVPS 3.4 2.1 3.9 2.6 3.0 3.5

CASHFLOW STATEMENT (IN PHPMIL)


FY14 FY15 FY16 FY17E FY18E FY19E
Income (loss) before income tax 581 659 936 1,040 1,182 1,325
Depreciation & Amortization 164 210 138 177 206 236
Other Non-Cash Exp (Gains) (16) (14) (79) 177 176 175
Interest income 3 4 3 - - -
Increase (decrease) in Working Cap (73) (225) 114 (96) 17 17
Income tax expense (156) (172) (178) (291) (331) (371)
Operating Cash Flow 504 462 934 1,006 1,250 1,382
Capex (295) (350) (418) (738) (431) (458)
Other Investments (331) 20 (6,451) 1,125 - -
Investing Cash Flow (626) (329) (6,869) 388 (431) (458)
Proceeds (Payment) Debts - - 4,975 (1,048) (25) (25)
Payment of Cash Dividends (134) (150) (1,102) (175) (172) (196)
Others - - 2,001 (177) (176) (175)
Financing Cash Flow (134) (150) 5,874 (1,400) (373) (395)
Effect of forex rates on cash and c.e. 0 0 0 - - -
Change in Cash (256) (17) (60) (6) 446 529

COL Financial Group, Inc. 4


EARNINGS ANALYSIS I PIZZA: RECURRING PROFITS UP 15.4% TO PHP519 MIL IN 9M17, IN LINE WITH COL AND
CONSENSUS

THU 09 NOV 2017

INVESTMENT THESIS: KEY RATIOS


FY14 FY15 FY16 FY17E FY18E FY19E
Three-pronged growth strategy
PIZZA remains optimistic about its growth GPM (%) 22.5% 22.8% 30.1% 29.7% 29.2% 28.9%
prospects, especially this 2017, as it expects EBITDA Margin (%) 14.8% 16.5% 20.1% 20.0% 19.6% 19.5%
to maintain its market leadership position OPM (%) 11.3% 11.7% 13.5% 17.5% 17.1% 16.8%
and continue its double-digit topline NPM (%) 9.1% 9.1% 12.8% 10.7% 10.7% 10.7%
growth. The company plans to achieve this Times Interest Earned (X) - - 6.2 6.9 7.7 8.6
by expanding its stores, growing its delivery Current Ratio (X) 1.05 1.28 1.08 1.15 1.51 1.04
business, and increasing its efforts in finding
Net D/E Ratio (X) (0.32) (0.25) 1.40 0.91 0.68 0.29
local and international franchisees that fit
the companys vision and goals. This 2017, Days Receivable 28.3 33.9 30.7 30.0 30.0 30.0
PIZZA is expecting topline growth in the mid- Days Inventory 18.6 22.3 21.7 20.0 20.0 20.0
teens and earnings growth in the low-teens. Days Payable 95.1 87.7 77.8 68.0 68.0 68.0
Asset T/O (%) 193.9% 196.8% 63.4% 77.8% 81.6% 83.9%
Exciting industry growth prospects ROAE (%) 30.2% 19.4% 20.8% 17.5% 17.0% 16.4%
The Philippine consumer foodservice
sector continued to reap the benefits MAJOR CORPORATE DEVELOPMENTS (5-YEARS)
of growing average family income,
continuous urbanization, young population,
and increasing OFW remittances. Still, Went public with primary shares of around 104 Mil at Php11.26/sh 2H16
outperforming the whole industry is the
chained full-service pizza restaurant category Century Pacific Group (CPG) and Arran Investments (GIC) acquired control from
which expanded at a CAGR of 21.7% in 1H16
Prieto family.
the past five years, outpacing the 4.0%
CAGR of the whole full-service restaurant
market in the same period. Pizza restaurants Acquired Shakey's trademark for Middle East, Asia (ex. Japan and Malaysia),
2014
outperformance was due to several factors Australia, and Oceania.
including the versatility of pizza as food which
can be consumed as a main meal or as a
snack. In the next five years, the chained pizza
full-service restaurant category is projected
to expand at a CAGR of 14.0%. By 2020, the
chained full-service pizza market is estimated
to reach Php27.1Bil, already accounting
for 18.7% of the estimated Php144.9Bil
total full service restaurant market.

In a sweet spot among restaurants


We believe that PIZZA is in a sweet spot
among restaurants in the country. From 2011
to 2015, the market size of the chained full
service pizza industry increased by a CAGR of
21.7%, largely outpacing the 10.6% CAGR of
the overall fast food market. We believe that
this trend will continue given growing average
family income, among other things. Note
that the potential passage of the tax reform
program later this year could potentially lead
to ~20% increase in disposable income for
93% of the 5.6Mil tax payers in the Philippines.
This could also potentially translate to a
trade up amongst consumers from fast food
restaurants to Shakeys. Moreover, the chained
food service market is that consumers are
less price-sensitive given their higher level
of affluence. This puts Shakeys in a better
position to pass on higher costs brought
about by higher raw material prices.

COL Financial Group, Inc. 5


EARNINGS ANALYSIS I PIZZA: RECURRING PROFITS UP 15.4% TO PHP519 MIL IN 9M17, IN LINE WITH COL AND
CONSENSUS

THU 09 NOV 2017

Valuation RELATIVE VALUATION


P/E EPS Growth
Methodology 2017E 2018E 2017E 2018E
Domino's Pizza Inc. 34.7 29.3 32.4% 18.5%
Yum! Brands Inc. 27.2 24.0 14.6% 13.2%
Jollibee Foods Corporation 39.8 33.2 8.3% 20.1%
Max's Group, Inc. 21.9 19.6 14.8% 11.8%
Papa John's Intl Inc. 25.5 22.1 12.1% 15.1%
Average ex-PIZZA 29.8 25.6 16.4% 15.7%
Median ex-PIZZA 27.2 24.0 14.6% 15.1%
Shakey's Pizza Asia Ventures, Inc. 26.54 23.36 -43.7%* 13.6%
* IP O was last just 2016
A s o f September 20, 2017

VALUATION ASSUMPTIONS

For DCF
Risk Premium 5.0%
Risk Free Rate 5.0%
Beta 0.90
Cost of Equity 9.5%
Cost of Debt 5.0%
Tax Rate 28.0%
WACC 8.0%
Terminal Growth Rate 4.0%

PV (2018E-2022E) 4,051
PV of Terminal Value 24,014
Enterprise value 28,065
Less: Net Debt 3,139
Equity Value 24,926
O/S 1,531
FV Estimate 16.30

COL Financial Group, Inc. 6


EARNINGS ANALYSIS I PIZZA: RECURRING PROFITS UP 15.4% TO PHP519 MIL IN 9M17, IN LINE WITH COL AND
CONSENSUS

THU 09 NOV 2017

IMPORTANT RATING DEFINITIONS


BUY
Stocks that have a BUY rating have attractive fundamentals and valuations based on our analysis. We expect the share price to outperform the market in the next six to
12 months.

HOLD
Stocks that have a HOLD rating have either 1) attractive fundamentals but expensive valuations 2) attractive valuations but near-term earnings outlook might be poor
or vulnerable to numerous risks. Given the said factors, the share price of the stock may perform merely in line or underperform in the market in the next six to twelve
months.

SELL
We dislike both the valuations and fundamentals of stocks with a SELL rating. We expect the share price to underperform in the next six to12 months.

IMPORTANT DISCLAIMER
Securities recommended, offered or sold by COL Financial Group, Inc. are subject to investment risks, including the possible loss of the principal amount invested.
Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and said information may be
incomplete or condensed. All opinions and estimates constitute the judgment of COLs Equity Research Department as of the date of the report and are subject to change
without prior notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. COL Financial and/
or its employees not involved in the preparation of this report may have investments in securities of derivatives of the companies mentioned in this report and may trade
them in ways different from those discussed in this report.

COL RESEARCH TEAM

APRIL LYNN TAN, CFA


VP & HEAD OF RESEARCH
april.tan@colfinancial.com

CHARLES WILLIAM ANG, CFA GEORGE CHING RICHARD LAEDA, CFA


DEPUTY HEAD OF RESEARCH SENIOR RESEARCH MANAGER SENIOR RESEARCH MANAGER
charles.ang@colfinancial.com george.ching@colfinancial.com richard.laneda@colfinancial.com

FRANCES ROLFA NICOLAS ANDY DELA CRUZ JUSTIN RICHMOND CHENG


RESEARCH ANALYST RESEARCH ANALYST RESEARCH ANALYST
rolfa.nicolas@colfinancial.com andy.delacruz@colfinancial.com justin.cheng@colfinancial.com

KYLE JEMMRIC VELASCO JOHN MARTIN LUCIANO ADRIAN ALEXANDER YU


RESEARCH ANALYST RESEARCH ANALYST RESEARCH ANALYST
kyle.velasco@colfinancial.com john.luciano@colfinancial.com adria.yu@colfinancial.com

COL FINANCIAL GROUP, INC.


2402-D EAST TOWER, PHILIPPINE STOCK EXCHANGE CENTRE,
EXCHANGE ROAD, ORTIGAS CENTER, PASIG CITY
PHILIPPINES 1605
TEL NO. +632 636-5411
FAX NO. +632 635-4632
WEBSITE: www.colfinancial.com

COL Financial Group, Inc. 7