Japan Foods - RHB Invest 2018-08-07: 1Q19 Revenue Weakness A One-Off Occurrence

Japan Foods - RHB Securities Research 2018-08-07: 1Q19 Revenue Weakness A One-Off Occurrence JAPAN FOODS HOLDING LTD. SGX:5OI

Japan Foods - 1Q19 Revenue Weakness A One-Off Occurrence

  • Maintain BUY, new SGD0.58 Target Price from SGD0.63, 19% upside. as we cut earnings estimates to impute the recent SSSG decline for Ajisen Ramen in Singapore, lower profit contributions from associates, and marginally lower margins for FY19F-21F.
  • We remain optimistic about strong revenue contributions from Shitamachi Tendon Akimitsu, and the continued expansion in the number of restaurants for Ajisen Ramen and Menya Musashi.
  • Despite delivering 17% YTD returns, its stock remains cheap compared to peers.

Weakness in Ajisen Ramen a one-off occurrence.

  • During our recent meeting with management, it said that the SGD0.7m y-o-y decline in 1QFY19 (Mar) revenue from the Aijsen Ramen brand in Singapore was attributed to a SGD0.5m decline caused by one restaurant being rebranded from Ajisen Ramen to Menya Musashi.
  • Meanwhile, the SGD0.4m decline in SSSG for some Ajisen Ramen restaurants was offset by a 10% increase in revenue from newly- renovated Den by Ajisen outlets. Management attributed some weakness in SSSG to the 2018 FIFA World Cup, which led to lower foot traffic at its restaurants in June.

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New brands continue to deliver growth.

  • Its Shitamachi Tendon Akimitsu restaurants delivered SGD2.3m in revenue during 1QFY19, making it the third largest brand for the group after Ajisen Ramen (SGD6.1m) and Menya Musashi (SGD3.8m).
  • While Japan Foods does not plan to rapidly expand the number of Shitamachi Tendon Akimitsu restaurants, we believe its recently-launched new franchise brands – Konjiki Hototogisu and Kagurazaka Saryo – could see similar success over the next few quarters.

New franchise dessert brand.

  • The group has launched Kagurazaka Saryo, a 20-year old Japanese dessert brand. The desserts include cakes and ice creams with matcha (green tea) as a key ingredient. This brand will eventually replace Japan Foods’ own brand, Food Paradise. To counter Food Paradise’s weakness of being purely a dessert outlet, Kagurazaka Saryo stores will also offer Japanese porridge and udon to capture lunch and dinner foot traffic.

Moderating expectations.

  • While management continues to guide for 85% gross margins, the launch of a new premium franchise brand (Konjiki Hototogisu, for Michelin Bib Gourmand ramen), which commands higher material costs, could drag on gross margins until significant scale is achieved.
  • We lower FY19F-21F earnings by 5-9% to also account for lower profit contribution from associates.

Maintain BUY

  • Maintain BUY as we believe that the stock is trading at a discount relative to peers. This is unjustified, given its industry-leading yields, high gross profit margin and stable growth prospects from the launch of new franchise brands.
  • We also assess the likelihood of gradual DPS growth. Japan Foods has a net cash balance of SGD24.5m, ie 30% of its market cap. We forecast a SGD0.05 increase in DPS over FY19F-21F, implying yields of 4.4-4.5%.
  • Our Target Price implies 16.6x FY19F P/E, which is still lower than that of its listed peers.

Shekhar Jaiswal RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-08-07
SGX Stock Analyst Report BUY Maintain BUY 0.58 Down 0.630