Japan Foods - RHB Invest 2019-04-17: Ground Checks ~ Hototogisu Delivering Growth


Japan Foods - Ground Checks: Hototogisu Delivering Growth

  • Stay NEUTRAL with SGD0.45 Target Price, 1% downside, 4.4% FY20F (Mar) yield.
  • We visited Japan Foods’ latest ramen franchise restaurant Hototogisu at Jewel Changi and came back positive about the brand’s potential to generate higher revenue per restaurant. See photos in attached PDF report.
  • Although the ongoing rationalisation of stores and moderating consumer discretionary spending amidst slowing economic growth should drag profits lower in FY19, contributions from new franchise brands and Japan Foods’ JV with Minor could translate into return of profit growth in FY20.

Hototogisu continues to register strong consumer interest.

  • JAPAN FOODS HOLDING LTD. (SGX:5OI) launched the Hototogisu franchise brand in Jun 2018, with its first outlet at Chijmes. Since then the group has launched three more outlets, one each at Great World City, Paragon and the latest one at Jewel Changi.
  • In our note: Japan Foods - RHB Invest 2018-08-29: Ground Checks At Its Latest Ramen Restaurant, we had estimated the brand to generate an average revenue per customer (RPC) of SGD24 during early months after launch of a new outlet. We believe that on a steady state, the brand could generate an average RPC of SGD18-19, which is still higher than the average RPC of SGD15 for Japan Foods’ flagship Ajisen Ramen brand.
  • With a higher number of customers visiting Hototogisu outlets each day, we believe the brand could generate SGD200,000-250,000 per month, which is higher than any other brand that Japan Foods manages.

New brands could show up at Funan.

  • In Jan 2019, Japan Foods secured a new franchise brand, Afuri Ramen, which is known for its yuzu-flavoured broth. The group has also planned a new extension to rejuvenate its twenty-year-old flagship Ajisen Ramen brand. The extension will be named Kara- Men by Ajisen, and will offer different levels of spiciness for the broth.
  • We believe both brands could find a place at the new Funan Mall, which is expected to launch by end-2Q19.

Update on its JV with Minor.

  • In Dec 2018, Japan Foods announced a 50:50 JV with Minor Singapore (Minor), which will allow it to bring Minor’s Thai restaurants to Japan, while enabling the latter to expand Japan Foods’ brands in Thailand and China.
  • In Mar 2019, Japan Foods contributed SGD200,000 as its share of equity in the JV. Dining Collective, the JV company, is exploring opportunities to launch Minor’s restaurants in Japan and we believe it could open restaurants during 2H19.

Higher than STI yield should provide price support.

  • We remain optimistic on Japan Foods’ ability to pay high dividends amidst a net cash balance of SGD22m (30% of its market cap) and quarterly FCF generation of c.SGD1m. Its FY20F-21F yield of 4.4-4.8% is higher than the STI’s forward yield of 4%. 

Shekhar Jaiswal RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-04-17
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