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WE D 08 FEB 2017

SHAKEYS PIZZA ASIA VENTURES:


Fast growing restaurant facing less risks

Three-pronged growth strategy. PIZZA remains optimistic about its growth prospects, especially
this 2017, as it expects to maintain its market leadership position and continue its double-digit topline
growth. The company plans to achieve this by expanding its stores, growing its delivery business,
and increasing its efforts in finding local and international franchisees that fit the companys vision
and goals. This 2017, PIZZA is expecting topline growth in the mid-teens and earnings growth in the
low-teens.

In a sweet spot among restaurants. Shakeys is in a sweet spot among restaurants in the country.
From 2011 to 2015, the market size of the chained full service pizza industry where Shakeys belongs
to, increased by a compounded annual growth rate (CAGR) of 21.7%, largely outpacing the 10.6%
CAGR of the overall fast food market. Euromonitor expects this trend to continue given growing
average family income, among other things. Note that the 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. From 2015 to 2020, Euromonitor forecasts the market size of the chained
full service pizza industry to increase by CAGR of 14.0%, continuing to outpace the 4.9% CAGR of
the overall fast food market.

Another major advantage of 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. For example, note that prices of beef increased by
around 23.0% since its low in October 2016. Fast food companies such as JFC are expected to
absorb some of the higher cost initially as the market for its products are very price sensitive.

Priced at a premium compared to its peers. While PIZZAs growth prospects look very attractive,
our main concern is its valuation. At its current price of Php12.76/sh, PIZZA is trading at 30.9X
16E P/E based on an annualized 2016 core profits (two times the actual 1H16 profits minus the
Php252.8Mil one-time gain and accounting for the interest expense to be incurred on its Php5.0Bil
debt). This is a significant premium compared to the 23.2X median 16E P/E of the consumer sector.
Moreover, rough calculations suggest that core EPS could be flat in 2017 based on the companys
revenue growth guidance and the dilution of shares following the IPO, this is significantly lower than
the sectors median growth of around 10.3% y/y.

FORECAST SUMMARY:
in PhpMil 2013 2014 2015
Revenues 4,154.3 4,696.5 5,244.3
% change y/y - 13.1 11.7
Gross Profit 913.5 1,058.0 1,196.0
% change y/y - 15.8 13.0
Gross Margin (%) 22.0 22.5 22.8
Operating Income 452.7 530.5 613.4
% change y/y - 17.2 15.6
Operating Margin (%) 10.9 11.3 11.7
Net Income 367.2 429.2 479.6
% change y/y - 16.9 11.7
Net Margin (%) 8.8 9.1 9.1
EPS 0.24 0.28 0.31
% change y/y - 16.9 11.7

Andy Dela Cruz


RELATIVE VALUE
P/E(X) 52.8 45.2 40.4 Research Analyst
P/BV(X) 20.2 15.3 12.3 andy.delacruz@colfinancial.com
ROE(%) 38.3 33.9 30.4
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.
Fi el d N o t es I S h akey s Pi z z a A si a V entur es

WED 08 FEB 2017

Three-pronged growth strategy

PIZZA remains optimistic about its growth prospects, especially this 2017, as it expects to maintain
its market leadership position and continue its double-digit topline growth. The company plans to
achieve this by expanding its stores, growing its delivery business, and increasing its efforts in find-
ing local and international franchisees that fit the companys vision and goals. This 2017, PIZZA is
expecting topline growth in the mid-teens and earnings growth in the low-teens.

Store expansions to be the main driver for growth

For 2017, PIZZA aims to open 20 new stores in the country. This is the highest planned store
opening to date as the company historically opened only 10 to 15 stores annually. Around 50% of
the new stores will be located in Metro Manila while the other half will mostly be in Luzon (ex. NCR)
and possibly in Visayas and Mindanao. With the 20 new stores, PIZZAs store network would grow
by 11.3% to 197 by the end of 2017.

Looking for franchisees to expand in VisMin and internationally

As of end June 2016, only 16 or 9.0% of stores were located in the Visayas and eight or 4.5% of
stores were located in Mindanao. However, PIZZA said that it is willing to expand outside of Lu-
zon. It is constantly looking for franchisees that are passionate enough to grow the business in the
Visayas and Mindanao areas, and even in other countries. Recall that PIZZA owns the right to use
the trademark of the Shakeys brand in Asia (excluding Japan and Malaysia), Middle East, New
Zealand, and Australia. In fact, PIZZA plans to open a store in the Middle East through a franchisee
by the first half of 2017. Management is keen on looking for local operators as partners/franchisees
as these people would know the local market better than anyone outside the area. Still, PIZZA is
open to the possibility of opening a company owned store if it sees an attractive opportunity as-
suming that there are no suitable franchisee/s available.

In a sweet spot among restaurants

Shakeys is in a sweet spot among restaurants in the country. From 2011 to 2015, the market size
of the chained full service pizza industry where Shakeys belongs to, increased by a compounded
annual growth rate (CAGR) of 21.7%, largely outpacing the 10.6% CAGR of the overall fast food
market. Euromonitor expects this trend to continue given growing average family income, among
other things. Note that the 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. From
2015 to 2020, Euromonitor forecasts the market size of the chained full service pizza industry to
increase by CAGR of 14.0%, continuing to outpace the 4.9% CAGR of the overall fast food market.

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 2
of the COL Financial website as these may be subject to tampering or unauthorized alterations.
Fi el d N o t es I S h akey s P i z z a A si a V entur es

W ED 08 FEB 2017

Exhibit 1: Market size CAGR of select industries


2010A - 2015A 2015A - 2020E
Chained full-service pizza 21.7% 14.0%
Overall fast food 10.6% 6.3%
Fast food pizza 6.4% 4.9%
Source: Euromonitor

Another major advantage of the chained food service market is that consumers are less price sen-
sitive 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. For example, note that prices of beef increased
by around 23.0% since its low in October 2016. Fast food companies such as JFC are expected
to absorb some of the higher cost initially as the market for its products are very price sensitive.

Margins rise due to synergies with CNPF

Since PIZZA and Century Pacific Food Inc. (CNPF) have the same principals, purchases of raw
materials can be done by bulk which would lead to lower costs. According to PIZZA, it could enjoy
a 200 to 300 bps improvement in EBITDA margin due to synergies with CNPPF. PIZZA already
started to benefit from synergies in early 2016, explaining part of the 500 bps improvement in
EBITDA margin during 1H16 compared to 1H15.

Priced at a premium compared to its peers

While PIZZAs growth prospects look very attractive, our main concern is its valuation. At its current
price of Php12.76/sh, PIZZA is trading at 30.9X 16E P/E based on an annualized 2016 core profits
(two times the actual 1H16 profits minus the Php252.8Mil one-time gain and accounting for the
interest expense to be incurred on its Php5.0Bil debt). This is a significant premium compared to
the 23.4X median 16E P/E of the consumer sector. Moreover, rough calculations suggest that core
EPS could be flat in 2017 based on the companys revenue growth guidance and the dilution of
shares following the IPO, this is significantly lower than the sectors median EPS growth of around
10.3% y/y.

Exhibit 2: Relative valuation


16E P/E (X)
CNPF 20.5
DNL 34.4
EMP 16.1
JFC 37.3
PGOLD 22.3
RRHI 23.4
URC* 24.2
Median ex-PIZZA 23.4
PIZZA 30.6
* Actual FY16 results
Source: COL Estimates

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 3
of the COL Financial website as these may be subject to tampering or unauthorized alterations.
Fi el d N o t es I S h akey s Pi z z a A si a V entur es

WED 08 FEB 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 Velasco John Martin Luciano


Research Analyst Research Analyst
kyle.velasco@colfinancial.com john.luciano@colfinancial.com

Contact

COL Financial Group, Inc.


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Exchange Road, Ortigas Center, Pasig City
1605 Philippines
Tel No. +632 636-5411
Fax No. +632 635-4632
Website: www.colfinancial.com

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 4
of the COL Financial website as these may be subject to tampering or unauthorized alterations.