RHB Group Research is keeping its “buy” recommendation on Japan Foods Holding with an unchanged target price of 60 cents, following SingStat’s latest retail numbers, which saw Singapore’s restaurant industry maintaining its growth momentum in October, as it registered 61.1% y-o-y sales growth for the month.
Analyst Shekhar Jaiswal says: “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 FY2023 to FY2025.”
Despite the current high inflationary background, the group’s margins have held up well. Jaiswal says, “We believe Japan Foods’ standardised food inputs across all its operations, an efficient central kitchen operation, and improved labour productivity should enable it to maintain its margins.”
In the group’s 1HFY2023 ended September, gross margins widened to 84.7% from 83.8% in 1HFY2022, despite inflation. To offset some rise in input costs, the group is gradually passing on higher costs to customers by raising its prices as the demand remains strong.
Meanwhile, Japan Foods has expanded its halal restaurant offering and grown the number of its halal restaurants from six in 1HFY2022 to 12 in 1HFY2023. It also expanded its portfolio of halal brands to five as of October.
Its halal restaurant contributed a net revenue increase of $6.4 million in 1HFY2023 to $9.6 million and accounted for 25.2% of the group’s total revenue for the period.
“We see this segment as an untapped market that offers strong growth potential,” says Jaiswal.
In FY2022, Japan Foods paid 100% of its net profit as dividends, which the analyst expects the group to maintain in FY2023 to FY2025, given its strong performance. This implies a dividend yield of over 5%, which is higher than what the Singapore market offers.
Jaiswal also views the stock’s ex-cash FY2023 P/E of 12x as compelling, given its robust growth potential.
As at 1.35pm, shares in Japan Foods are trading at 42 cents.