Japan Foods - RHB Invest 2019-11-08: New Brands Are Supporting Growth


Japan Foods - New Brands Are Supporting Growth

  • Keep NEUTRAL, SGD0.40 Target Price, 9% downside, 4.8% FY20F yield.
  • JAPAN FOODS (SGX:5OI)’s 1HFY20 (Mar) PATMI was below expectation amidst continuing losses reported by associates. See Japan Foods Announcements. We moderate FY20F-21F earnings by 6% to account for lower earnings from associates and roll forward to FY21.
  • While subdued consumer discretionary spending could pose near-term challenges, we believe contributions from new brands and its growing regional presence should help it deliver strong FY21F-22F profit.
  • A net cash position, strong FCF generation, and c.5% yield should provide share price support. 

New brands record strong growth.

  • Ajisen Ramen, Menya Musashi and Osaka Ohsho are Japan Foods’ key brands. These brands accounted for c.70% of Japan Foods’ revenue. While the introduction of Karamen sub brand has helped in reviving the revenue per store for Ajisen Ramen, the other two key brands continue to witness y-o-y decline in revenue per store.
  • As per 2QFY20 results, revenue contribution from these 3 brands fell to c.60%. However, the latest results seem to suggest that this weakness from key brands was more than offset by higher contribution from new brands, namely Konjiki Hototogisu, which now accounts for c.12% of the group’s revenue.

Raising our full year dividend expectations.

  • Japan Foods announced an interim dividend of 1 cent for 1HFY20 vs 0.8 cents announced during the same period last year. This implies a 115% payout ratio. See Japan Foods Dividend History.
  • Given its strong FCF generation capabilities, we have always believed that the group could rewards investors with higher dividends, while continuing to execute its growth plans.
  • We now estimate full-year dividend at 2.1 cents, implying 112% payout ratio and indicative yield of 4.8% based on the last closing price.

Associates continue to disappoint.

  • Japan Foods’ associate company in Hong Kong reported losses due to rise in competition and due to impact from the recent social unrest in the city. Its JV company, which is yet to commence operations, also reported losses due to the incurring of general overheads and administrative costs.
  • Japan Foods reported 1HFY20 loss of SGD34k from associates and JVs as against our estimate of profits.

Low valuation and c.5% yield should provide price support.

  • With its net cash balance accounting for c.30% of its market cap, Japan Foods’ ex-cash P/E is at a discount to listed restaurant peers in Singapore. In addition, an average annual FCF generation of > SGD3m should support the > c.5% yield during FY20F-22F.
  • Higher-than-estimated profit contribution from its new brands, and earlier-than-estimated profit contribution from its JVs are likely to re-rate the stock.
  • See Japan Foods Share Price; Japan Foods Target Price.

Shekhar Jaiswal RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-11-08
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