• Keep BUY and SGD0.55 TP, 28% upside and c.6% FY23F (Mar) yield. Amidst a revival in discretionary consumer spending, as Singapore is now fully open for business, monthly revenue at Japan Foods’ restaurants have returned to pre-pandemic levels. JFOOD has plans to capitalise on the economic revival and weak competition by looking to aggressively grow its number of outlets. We expect strong growth over FY23-25, with profit quickly reverting to pre-pandemic levels despite rising cost inflation.

• We remain confident of JFOOD maintaining margins. We estimate JFOOD to have 60 restaurants by end-Mar 2023 (currently 56). This rise in the number of outlets would mean YoY higher operating costs, especially from increased labour. In addition, rising cost inflation would imply higher input expenses across its entire operations. However, JFOOD’s standardised food inputs across all its operations, an efficient central kitchen operations, and improved labour productivity should enable it to maintain its margins. To manage the rise in input costs, the group is focusing on diversifying its raw materials sourcing. We note that it was able to keep its gross margins above 84% throughout the pandemic (FY22: 84.6%). We estimate FY23 gross margins at 84.4%.

• Net cash balance sheet offers growth potential. As at March, JFOOD had no borrowings and a cash balance of SGD23m (c.43% of market cap). While it believes this large cash balance gives it a buffer to survive any unexpected decline in economic activity, we assess that, once we get past the near-term economic weakness, this large cash balance will provide it with sufficient firepower to aggressively expand the number of outlets in Singapore or regionally, if needed.

• High dividend yield. During FY18-20, its dividend payout ratio stood at 68-214%. JFOOD announced 100% of net profit to be paid as dividends in FY22, which it expects to sustain in the future. We estimate the group’s dividend yield at >5% for FY22-23.

• Compelling valuation. We believe JFOOD’s FY24F P/E of 17x does not do justice to our expectations of its strong return to pre-pandemic profitability. On an ex-cash basis, the stock is trading at 12x FY23F P/E, which we believe is quite compelling. Our TP is derived by using an average of forward P/E, P/BV, EV/EBITDA, and DCF of adjusted free cash flow. JFOOD’s ESG score, based on our proprietary methodology, is 3.0. As this is 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 - 4 Jul 2022