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This ‘compelling’ stock is back to pre-Covid levels and an earnings recovery is underway: RHB

Chloe Lim
Chloe Lim • 3 min read
This ‘compelling’ stock is back to pre-Covid levels and an earnings recovery is underway: RHB
Photo: JFH
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RHB Group Research analyst Shekhar Jaiswal has kept his “buy” call on Japan Foods Holding with a target price of 55 cents, as Singapore is “fully open” and discretionary consumer spending is in a revival phase.

Thanks to that, the monthly revenue at Japan Foods’ restaurants have returned to pre-Covid-19 levels.

Japan Foods also has plans to capitalise on the economic revival and weak competition by looking to aggressively grow its number of outlets in the months to come.

“We expect strong growth over FY2023 ending March 2023 to FY2025, with profit quickly reverting to pre-Covid-19 levels despite rising cost inflation,” says Jaiswal.

The analyst estimates Japan Foods to have 60 restaurants by end-March 2023 (currently 56). “This rise in the number of outlets would mean y-o-y higher operating costs, especially from increased labour,” writes Jaiswal.

In addition, rising cost inflation would imply higher input expenses across its entire operations, notes the analyst.

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However, the way Jaiswal sees it, the group’s standardised food inputs across all its operations, efficient central kitchen operations, and improved labour productivity should enable it to maintain its margins. Furthermore, the group is focusing on diversifying its raw materials sourcing to manage the rise in input costs.

“We note that it was able to keep its gross margins above 84% throughout the pandemic,” the analyst notes, while estimating FY2023 gross margins to be at 84.4%.

As at March, Japan Foods had no borrowings and a cash balance of $23 million, representing approximately 43% of its market cap.

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“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,” the analyst writes.

On the other hand, during FY2018-FY2020, its dividend payout ratio stood at 68%-214%. Japan Foods announced 100% of net profit to be paid as dividends in FY2022, which it expects to sustain in the future. “We estimate the group’s dividend yield at above 5% for FY2022-FY2023,” says the analyst.

“We believe Japan Foods’ FY2024 P/E of 17x does not do justice to our expectations of its strong return to pre-Covid-19 profitability,” says Jaiswal. “On an ex-cash basis, the stock is trading at 12x FY2023 P/E, which we believe is quite compelling.”

Shares in Japan Foods are trading flat at 42 cents at a FY2023 P/B ratio of 2.3x and dividend yield of 5.5%.

Photo: JFH

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