Japan Foods Holding - RHB Invest 2018-05-11: Time To Recognise The Japanese Excellence

Japan Foods Holding - RHB Invest 2018-05-11: Time To Recognise The Japanese Excellence JAPAN FOODS HOLDING LTD. SGX: 5OI

Japan Foods Holding - Time To Recognise The Japanese Excellence

  • Maintain BUY with an unchanged SGD0.63 Target Price, offering a 24% upside as we expect Japan Foods Holding (JFH) to get re-rated since the Group continues to register strong earnings growth over FY19F (Mar).
  • After its FY18 results briefing we remain positive, as Japan Foods Holding reiterated the expectation for a strong revenue contribution from its newly-launched Shitamachi Tendon Akimitsu brand, along with growth prospects for its Indonesian JV.
  • We maintain that Japan Foods Holding should trade higher, based on its industry leading financial metrics such as an 85% gross margin and 4% yield.

There may still be scope for margin expansion.

  • While its industry leading gross margin hit an all-time high of 85%, Japan Foods Holding (JFH) believes that there is scope for further net margin expansion. 
  • JFH plans to further optimise its costs and aims to increase earnings from JVs to support higher margins. 
  • JFH also has limited concerns on the rise in labour and lease rental costs, as it assessed that an increase in both was well within expectations.

Revamping of brands and the introduction of new brands to support revenue growth.

  • Japan Foods Holding (JFH) plans to revamp its existing brands in order to make them better suited to changing customer preferences. Its recent rebranding exercise for Ajisen Ramen into Den by Ajisen Ramen has yielded positive results, with the later showing a 13% y-o-y revenue growth in FY18 compared to 4% y-o-y growth for Ajisen Ramen. 
  • JFH has also witnessed positive response for its newly-launched Shitamachi Tendon Akimitsu brand, which has been operational for only eight months and has already accounted for 6% of FY18 revenue. 
  • The Group plans to introduce two new franchise brands in FY19, with expectations of similar growth prospects.

Strong growth prospects in Indonesia.

  • FY19 will see the first contribution from Japan Foods Holding (JFH)’s Indonesian JV. The Group is optimist about Indonesia’s growth potential given the country’s population size and rising affluence. 
  • JFH mentioned that the initial setup cost for a restaurant in Indonesia was lower when compared to a similar operation in Singapore, while the operating margin was similar given Indonesia’s better cost economics. JFH’s JV partner already has a central kitchen in place, which should further enhance the profitability of its overall JV. We are yet to factor in any contribution from Indonesia in our estimates.

Strong cash balance could imply higher dividends.

  • SGD21.9m of cash balance and limited capex requirement could imply a strong likelihood of sustained increase in Japan Foods Holding (JFH)’s dividend payout
  • We are forecasting sustained increase in DPS during FY19F-FY21F, implying a dividend yield of 4.2%-4.4%.

Maintain BUY

  • Maintain BUY as we consider that Japan Foods Holding (JFH)'s stock trading at a discount relative to peers is unjustified, given its industry-leading dividend yield, high gross profit margin, improving ROE and steady earnings growth prospects. 
  • We have increased FY19F-FY20F earnings by 6%-8%, while leaving our Target Price unchanged at SGD0.63.

Shekhar Jaiswal RHB Invest | https://www.rhbinvest.com.sg/ 2018-05-11
SGX Stock Analyst Report BUY Maintain BUY 0.630 Same 0.630