Japan Foods - RHB Invest 2018-12-10: MOU Sets The Stage For Geographical Expansion


Japan Foods - MOU Sets The Stage For Geographical Expansion

  • Maintain NEUTRAL, SGD0.48 Target Price offers 4% upside with 4.7% FY20F yield while we assess the earnings impact of Japan Foods’ proposed MoU to form a 50:50 JV with Minor Singapore (Minor). Our sector Top Pick is Sheng Siong (SGX:OV8).
  • The proposed JV will enable Japan Foods to bring Minor’s Thai restaurants to Japan, while enabling the latter to expand Japan Foods’ Japanese brands in Thailand and China.
  • Both Japan Foods and Minor – an indirect subsidiary of Thai-listed Minor International (MINT TB) – will have up to six months from the date of the MoU to enter into a definitive JV agreement.

Rationale for the deal.

  • While the JV enables Japan Foods to expand its brands franchise in Thailand – a country where it does not have any business presence – this also fulfils its long-standing aspiration to bring regional Asian flavours to Japan.
  • Japan Foods already has some business presence in China through associate companies. However, the proposed JV with Minor should enable to it to further expand its brands’ presence in the world’s most populated country.
  • As a part of the MoU, Japan Foods will oversee, develop and manage the JV’s Thai cuisine restaurant operation in Japan and provide technical support and expertise in the preparation of Japanese cuisine. Likewise, Minor will oversee, develop and manage the JV’s Japanese cuisine restaurant operations in Thailand and China, as well as provide technical support and expertise in the preparation of Thai cuisine.

Financing and management control.

  • As per the MoU, Japan Foods, along with Minor, will contribute SGD100,000 each towards the JV’s share capital. In addition, the JV partners will also equally contribute to an aggregate shareholder loan of SGD2.3m, which will be used as the entity’s working capital. The amount will be disbursed equally by each shareholder as and when required by the JV.
  • Both, the share capital and shareholder’s loan will be funded by Japan Foods from its internal cash flow. As at end Sep 2018, Japan Foods had a net cash balance of SGD22m.
  • Japan Foods and Minor will ...

Upbeat on proposed JV.

  • While we are yet to assess the earnings impact, we view the formation of the proposed JV positively as it will enable Japan Foods and Minor to leverage on each other's operational strengths and industry experience, as well as their respective culinary expertise, while ensuring a much wider geographic presence for both entities.
  • Minor operates brands such as Thai Express, Xin Wang Hong Kong Cafe, Poulet and Buffet Town, which are very established in Singapore and elsewhere. We expect the Thai Express brand to find favour amongst the well-travelled Japanese population who enjoy international cuisine.

Maintain NEUTRAL, while we assess the earnings potential.

  • We continue to like Japan Foods’ strong Japanese restaurant franchise, ability to generate positive FCF, and net cash balance sheet. However, weak consumer sentiment, higher costs from launching premium restaurant concepts, and rapid expansion in restaurant numbers is expected to keep profitability in check over the next few quarters.
  • We remain NEUTRAL on the stock, while we assess the long-term earnings impact of the proposed JV with Minor.

Shekhar Jaiswal RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-12-10
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 0.480 SAME 0.480