Upgrade Jubilant Foodworks to ‘neutral from ‘underweight’ on expectation of higher same store sales growth (SSSG) growth and margin assumptions as a result of an 8% upward revision in our FY16/17 EPS estimates. We roll-forward our target price to December 2015. Our new target price is R1,500.
While the stock has underperformed its peer consumer group, it is still up 20% over the past six months. The stock held up well despite disappointing performance in the past as investors rewarded it for strong long-term growth prospects and expectations of impending macro recovery. We believe the worst is likely behind though growth recovery would be a gradual one.
After many quarters of disappointment, the company posted better than expected SSSG in Q3. It appears downside risk from macro challenges is lesser now. However, pace of recovery will likely be a gradual one with SSSG trending to HSD over 3-4 quarters. Incremental benefits from lower inflation bode well for margins.
We expect competitive intensity to remain high in QSR industry, however Jubilant continues to gain share (Yum: -10% SSSG, Westlife: flat SSSG in Q3) supported by initiatives related to new product development, strong push on online ordering and marketing efforts. Jubilant acknowledges that it scores lower on ‘value for money’ proposition and is closely monitoring its incremental pricing decisions to improve on this aspect, though we are yet to see any meaningful improvement on this front.