Japan Foods - RHB Invest 2018-08-29: Ground Checks At Its Latest Ramen Restaurant

JAPAN FOODS HOLDING LTD. SGX:5OI

Japan Foods - Ground Checks At Its Latest Ramen Restaurant

Maintain BUY, Target Price of SGD0.58, 19% upside.
Japan Foods is trading at a discount relative to peers, which is unjustified, given its industry-leading yields, high gross profit margin and stable growth prospects from the launch of new franchise brands.
We visited Japan Foods’ new ramen franchise restaurant Konjiki Hototogisu and came back positive about the brand’s potential for generating higher revenue per restaurant. We are also upbeat on the likelihood of it delivering net margins similar to other key brands. While this alleviates our concerns about its lower GPM, we do not expect the brand to make material revenue contributions amidst limitations on growth in the number of new restaurants.

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Japan Foods usually looks for restaurant locations with an area of 2,000 sq ft or less. Average area of its Ajisen Ramen and Menya Musashi restaurants is between 1,000-1,800 sq ft. Its Konjiki Hototogisu restaurant is housed in a c.900 sq ft space.
In contrast to other key brand restaurants, which are usually in key malls, Konjiki Hototogisu is located in CHIJMES, a historic complex with no direct access to a mall or MRT station. This implies higher foot traffic only for lunch/dinner during weekdays, and throughout the day on weekends.

The average monthly rental for Japan Foods’ key restaurants is c.SGD25 psf. Given its unique location, the Konjiki Hototogisu restaurant should enjoy a lower rental rate of SGD18-22 psf (based on the Commercial Guru website). This translates into 10-30% lower rental cost, which, we believe, should compensate for higher material costs incurred by Japan Foods for premium ingredients used in making the Michelin Bib Gourmand ramen.
While Konjiki Hototogisu’s GPM may be lower than that of other brands, NPM should be similar.

Japan Foods indicated that the average spend per person for Konjiki Hototogisu is at SGD22-25. This is significantly higher than SGD15 for Ajisen Ramen and SGD17 for Menya Musashi. Although Konjiki Hototogisu seats only 35 people at any time – half of what other branded restaurants accommodate – the significantly higher spend per person implies that monthly revenue from Konjiki Hototogisu exceeds that of other brands.
Assuming a seating capacity of 50 people, revenue from Konjiki Hototogisu could be 13-20% higher than other brands.

We believe the premium nature of the franchise brand, higher pricing and material costs along with need for suitable (low rental cost) locations imply the growth of the Konjiki Hototogisu restaurant network is limited.
Unlike Ajisen Ramen and Menya Musashi, for which Japan Foods operates 18 and 10 restaurants, respectively, in Singapore, the group may only look at operating only 1-2 additional Konjiki Hototogisu outlets in the near term.
Key risks to our rating are rising labour costs and rental expenses, lower consumer spending and the non-renewal of franchise agreements.

Shekhar Jaiswal RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-08-29

SGX Stock Analyst Report BUY Maintain BUY 0.580 Same 0.580