- BUY with new SGD0.55 TP from SGD0.50, 31% upside and c.5% FY22F (Mar) yield. Amidst expectation of a gradual revival in consumer discretionary spending, as Singapore is now fully open for business and tourism, we made small upgrades to the FY23F-24F earnings. The TP increase was largely driven by rolling forward of our valuation basis to FY23 from FY22 estimates. While a return to pre-pandemic earnings may still be few years away, Japan Foods’ plans to gradually resume its international expansion should support higher profits in the medium term.
- Beneficiary of the economic reopening. Singapore has reopened the domestic economy with most of the safe-management measures related to the pandemic being relaxed. This has led to higher footfall/visits to workplaces as well as retail and recreational places. International borders have also opened up, creating opportunity for higher tourist inflows into the country. We see these factors as positive for Singapore’s F&B industry and believe it will boost JFH’s revenue over the next 12 months. The firm is also in a much better position to ride the recovery, as the pandemic has lowered competition, with many F&B operators either shutting or scaling back operations. During the pandemic, JFH cut its restaurant count to 50. However, as at Sep 2021, its number of restaurants has increased to 52.
- Addressing new business segments without much effort. JFH’s flexible business model puts it in a favourable position to expand market share. We like its ability to: i) Rotate restaurant brands across the 50+ leased spaces in major retail locations and ii) constantly introduce new concepts. Despite COVID-19, JFH launched its new halal concept restaurant Tokyo Shokudo, which has received positive responses from the Muslim community since its Nov 2020 launch. In c.10 months, Tokyo Shokudo restaurant numbers have expanded from one to six, generating SGD3.2m of revenue in 1HFY22 or c.15% of 1HFY22’s total revenue.
- Strong cost controls, net cash balance sheet and higher dividends. JFH has remained focused on raw material costs and was able to keep its gross margins above 84% throughout the pandemic (1HFY22: 84.7%). While FY21 EBIT was supported by government grants, our FY23F EBIT already factors in a zero government support. As at Sep 2021, JFH had no borrowings and a cash balance of SGD18.2m (c.25% of market cap). During FY18-20, its dividend payout ratio stood at 68-214%. In its 1HFY22 results presentation, JFH said it will be revising its dividend policy to distribute at least 100% of net profit as dividends from FY22. We estimate JFH’s dividend yield at >5% for FY22F-23F.
- We assess JFH’s ESG score to be at 3.0. As this is in in line with the country median score, we ascribe a 0% premium/discount to its fair value to arrive at our TP.
Source: RHB Research - 29 Apr 2022
