• Stay BUY and SGD0.60 TP, 41% upside and c.6% FY24F (Mar) yield. Japan Foods’ better-than-expected 9MFY23 business update provided clear evidence of the F&B services’ strong demand in Singapore. While this trend may sustain in the near term, challenges remain from an uncertain economic outlook, inflationary cost pressures, and manpower shortages. It should fare better than peers given its strong balance sheet, ability to sustain strong gross margins, and recent expansion into halal restaurant brands, thereby supporting strong FY23F-25F profit growth.

• Positive surprises from the 9MFY23 business update. For 9MFY23, JFOOD reported a revenue of SGD58.4m (+54% YoY) on the back of strong demand for F&B services as Singapore relaxed COVID-19-related restrictions and from the positive response to the group’s expanded franchise in halal-segment restaurants. The reported revenue accounted for 85% of our earlier FY23F. Despite inflationary cost pressures, it was able to sustain an 84.6% gross profit margin. Even with a sharp decline in government support and rental rebates from landlords, the group managed to report a 95% YoY increase in net profit to SGD3.2m. This accounted for 84% of our estimate.

• Outlook looks promising. JFOOD should deliver strong topline growth on the back of an increase in dine-in customers despite operating challenges that plague the F&B industry in Singapore. It should also see positive effects from its expansion into halal concept restaurants. The number of halal-certified restaurants that it operates has risen from just four in FY21 to 21 as of 31 Dec 2022. Given the growing demand for halal-certified restaurants, we maintain that this segment will continue to support strong revenue growth for the group during the forecast period. It also continues to bring new concepts and compelling brands to Singapore. As per management, its newly launched brand, "Nakiryu", at Plaza Singapura has received a positive response from customers. Nakiryu is a Japanese restaurant that has been receiving a Michelin star in Tokyo every year since 2017.

• Strong dividend yield and compelling valuation. On the back of better- than-expected 9MFY23 numbers, we have upgraded FY23F-25F profit by 5-6%. JFOOD paid 100% of its net profit as dividends in FY22 – we expect it to maintain during the forecast period. This implies a dividend yield of 5.5%. We view its ex-cash FY24F P/E of 11x as compelling, given the group’s robust growth potential. Our TP includes a 0% ESG premium/discount to its fair value.

Source: RHB Research - 10 Mar 2023