• As per SingStat, the restaurant industry in Singapore has continued to register strong (+61.1%) y-o-y sales growth in October. While we expect the rate of growth to moderate, we still expect the industry to deliver positive growth in 2023.
• Japan Foods’ strong balance sheet, which has helped it to survive the pandemic, its ability to sustain strong gross margins, and its recent expansion into halal restaurant brands should continue to support strong profit growth during FY23-25.

Expecting Positive Retail Sales Growth in 2023

• As per the Singapore department of statistics (SingStat), sales of F&B services grew 36.9% y-o-y in October, extending the 29.6% y-o-y increase in September. The large growth in F&B sales in October was mainly attributed to the low base in Oct 2021, when there were stricter restrictions on dining-in at F&B establishments.
• The turnover of restaurants increased by 61.1% y-o-y during this period. On a seasonally adjusted basis, sales of F&B services increased 1.0% m-o-m, while the turnover of restaurants fell 0.9% m-o-m in October.
• While we expect sales momentum to slow in 1H23 due to the economic headwinds and higher GST rates effective 1 Jan 2023, we still expect F&B sales to register positive growth in 2023.

Margins Have Held Up Well Despite High Inflation

• We believe Japan Foods (SGX:5OI)’ standardised food inputs across all its operations, an efficient central kitchen operations, and improved labour productivity should enable it to maintain its margins. Its gross margin widened to 84.7% in 1HFY23 from 83.8% in 1HFY22 (FY22: 84.6%), despite the inflationary environment.
• To offset some rise in input costs, Japan Foods is gradually passing on higher costs to customers by raising its prices as the demand remains strong.

Halal Franchise Offers Strong Growth Prospects

• Japan Foods has expanded its halal restaurant offering and grown the number of its halal restaurants from six in 1HFY22 to 12 in 1HFY23. It also expanded its portfolio of halal brands to five as of Oct 2022.
• Halal restaurants contributed a net revenue y-o-y increase of S$6.4m in 1HFY23 to S$9.6m and accounted for 25.2% of Japan Foods' total revenue in 1HFY23. We see this segment as an untapped market that offers strong growth potential.

Above Market Dividend Yield and Compelling Valuation

• Japan Foods paid 100% of its net profit as dividends in FY22, which we expect it to maintain in FY23-25. This implies a dividend yield of more than 5%, which is higher than what the Singapore market offers.
• We view its ex-cash FY23F P/E of 12x as compelling, given its robust growth potential. Our target price for Japan Foods includes a 0% ESG premium/discount to its fair value.

• Reiterate BUY on Japan Foods with S$0.60 target price offering 41% upside and ~5% FY23F (Mar) yield.

Source: RHB Invest Research - 7 Dec 2022