Japan Foods - RHB Invest 2020-05-06: Expecting Near-Term Earnings Weakness


Japan Foods - Expecting Near-Term Earnings Weakness

  • The near-term impact caused by the circuit breaker (CB) measures implemented will be partially offset by initiatives announced in recent government budgets. We expect FY21 (Mar) earnings for the food & beverage (F&B) unit to stay under pressure amidst the ongoing social distancing adoption.
  • The long-term trend seems positive, as net cash balance sheet and positive FCF generation should enable a refocus on growth when competition and operating costs are lower in FY22.
  • NEUTRAL, new SGD0.35 Target Price from SGD0.40, 0% upside and 6% yield.

Japan Foods operating at lower numbers during CB.

  • In early April, Japan Foods (SGX:5OI) said it will maintain a skeletal operational model and keep only 13 out of 58 restaurants in Singapore open while the CB is in place. We understand this number has dropped to 11 right now.
  • The decline in revenue from smaller operations has been largely offset by deferment of rental payments and 75% coverage for staff costs under the Government’s Jobs Support Scheme. Japan Foods has seen a rise in takeaways and delivery services, but the revenue impact is not significant. We lower FY20F profits by 6%.

Earnings pressure to exist beyond the CB period.

  • Japan Foods is planning to start operations at its currently closed restaurants from mid-May. This is in anticipation of a relaxation in the CB measures by early June. However, the continuing implementation of social distancing measures should imply that it will have to operate its restaurant at sub-optimal capacities for the next 12 months, at least. This should translate into a 30% decline in FY21 revenue.
  • With limited scope to negotiate lower rental in the near term, margins pressure will remain elevated. We lower FY21F profits by 46%.

Lower dividends for FY21 despite strong FCF generation.

  • In the last five years, Japan Foods paid out 60-90% of earnings as dividends. See Japan Foods Dividend History. This could drop to the mandated minimum of 50% for FY21, implying a dividend yield of only 1%.
  • We expect the payout ratio to increase once earnings recovery kicks in FY22.
  • Given its robust business model, Japan Foods is still expected to generate a FY21 FCF yield of 4.2%.

Staying NEUTRAL, growth to return in FY22.

Shekhar Jaiswal RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-05-06
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 0.35 DOWN 0.400