JAPAN FOODS HOLDING LTD. (SGX:5OI)
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.
- Our SGD0.35 Target Price, which is derived by using an average of P/E, P/BV, EV/EBITDA, and DCF of FCF captures the near-term earnings headwind.
- See Japan Foods Share Price; Japan Foods Target Price; Japan Foods Analyst Reports; Japan Foods Dividend History; Japan Foods Announcements; Japan Foods Latest News.
- Compared to other SGX-listed F&B players, Japan Foods has a strong net cash balance sheet – net cash is 37% of its market cap and far superior financial metrics. This should enable it to sustain operations beyond the weak FY21 period.
- In the next 1-2 years, we expect a good number of F&B players to exit operations in Singapore, therefore reducing competition for Japan Foods. Moreover, operating costs could also decline in FY22, amidst lower expected labour and rental costs.
Shekhar Jaiswal
RHB Securities Research
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https://www.rhbinvest.com.sg/
2020-05-06
SGX Stock
Analyst Report
0.35
DOWN
0.400
