Japan Foods - RHB Invest 2018-08-02: Undervalued Japanese Restaurant Operator

JAPAN FOODS HOLDING LTD. SGX:5OI

Japan Foods - Undervalued Japanese Restaurant Operator

Maintain BUY, SGD0.63 Target Price offers 33% upside, as we expect Japan Foods to be re-rated amidst strong growth in FY19F.
We believe there could be upside to our estimates if its Shitamachi Tendon Akimitsu brand delivers better-than-expected growth.
We visited the Ajisen Ramen outlet @ Changi City Point over the weekend and came back positive about the food and foot traffic. However, we note that like the rest of Singapore’s F&B industry, Japan Foods has not managed to escape the problems of labour scarcity.

Despite delivering 12% YTD returns, its stock remains cheap compared to peers. It offers industry-leading financial metrics, such as an 85% gross margin and 4% yield.

In June, Japan Foods launched its newest franchise operation for Konjiki Hototogisu, a ramen store from Tokyo. Konjiki Hototogisu, founded in 2006 by Chef Atsushi Yamamoto in Tokyo, has been awarded the Michelin Bib Gourmand title consecutively from 2015 to 2018.
We assess that need for premium ingredients for this restaurant while keeping ramen prices affordable may translate into marginally lower gross margins. However, lower rentals for the first outlet should translate into unchanged operating margins. Moreover, Japan Foods should see economies of scale as the number of outlets for this franchise rises.

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During our recent visit to Japan Foods’ Ajisen Ramen outlet @ Changi City Point, we noted that the group has been aggressively trying to manage operating costs at its restaurants. Availability of iPad devices to place orders and a simplified food menu have ensured that the group can operate its restaurants with reduced manpower. However, as the number of franchise brands and the number of restaurants increase, it will need more manpower, which is expensive and scarce in Singapore.
We noted that Japan Foods was willing to offer SGD10.50/hour for part-time staff.

We have always commended Japan Foods’ good corporate governance, disclosure and transparency. During the recent Singapore Corporate Awards 2018, it won awards in the “Best Managed Board” and “Best CFO” categories for SGX-listed companies with less than SGD300m in market cap.
In the past, Japan Foods was named “Most Transparent Company (Overall Winner for Catalist)” at the SIAS Investors’ Choice Awards 2016, and won the “Transparency Award – SMEs” at the SIAS Investors’ Choice Awards 2017 for commendable standards in disclosure and transparency.

Maintain BUY as we believe that the stock is trading at a discount relative to peers is unjustified, given its industry-leading yields, high gross profit margin and strong earnings growth prospects from the launch of new franchise brands and JVs in the region.
We also assess that there is a likelihood of gradual increases in DPS. Japan Foods has a net cash balance of SGD21.9m, which accounts for c.25% of its market cap. Given the limited capex requirement, we forecast a SGD0.05 increase in DPS over FY19F-21F, implying yields of 4.5- 4.7%.
Our Target Price implies 17x FY19F P/E, which is still lower than its listed peers’.

Shekhar Jaiswal RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-08-02

SGX Stock Analyst Report BUY Maintain BUY 0.630 Same 0.630