Simons Trading Research

Author: simonsg   |   Latest post: Tue, 13 Dec 2022, 10:52 AM


Japan Foods - Strong Earnings Recovery on the Cards; Still BUY

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  • Japan Foods (SGX:5OI)’s FY22 reported profit exceeded our estimate. With monthly revenue at its restaurants returning to pre-pandemic levels within the first few months of relaxation of COVID-19 restrictions in Singapore, and Japan Foods looking to aggressively grow its number of outlets, we expect strong growth over FY23F-25F, with profit quickly reverting to FY19 levels.
  • Our FY21-22 recurring profit excluded the government grants to make the forecast numbers comparable.
  • Keep BUY rating and S$0.55 target price for Japan Foods, 31% upside and ~6% FY23F (Mar) yield.

Japan Foods' FY22 Earnings in Line

  • FY22 reported profit of S$3.2m, was significantly ahead of our estimate of S$2.8m. This was largely aided by a strong recovery in customer footfall across all its restaurants and higher sales intensity for its new halal brand restaurants during 2HFY22. The halal restaurants accounted for ~21% of FY22 revenue.
  • As at Mar 2022, Japan Foods had 56 restaurants in Singapore (Mar 2021: 50), while the number of halal restaurants increased to nine (Mar 2021: one). Japan Foods noted that monthly revenue for its restaurants at suburban malls has reverted back to pre-pandemic levels.

Return of Outlet Expansion

  • Japan Foods is looking to add seven new restaurants in FY23, of which five would be halal restaurants. Out of the five halal restaurants, it has already opened two restaurants in the current quarter. We conservatively estimate Japan Foods to have 60 restaurants by end Mar 2023. This translates to FY23F capex of S$4.5m.

There Is Cost Pressure, But Confident of Maintaining Margin

  • Growth in the number of outlets would also mean pandemic (FY22: 84.6%). We estimate FY23 gross margin at 84.4%.

Large Cash Balance Opens Up Growth Opportunities

  • As at Mar 2022, Japan Foods had no borrowings and a cash regionally, if needed.

High Dividend Yield

  • As disclosed earlier, Japan Foods announced 100% of net profit to be paid as dividends in FY22, which it expects to sustain in the future. We estimate its dividend yield at > 5% for FY23F-25F.
  • Japan Foods’s ESG score 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 target price.

Source: RHB Invest Research - 27 May 2022

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