SINGAPORE (Nov 12): RHB Research is downgrading its call on Japan Foods to “neutral” from “buy” with a lower target price of 48 cents compared to 58 cents previously, as it believes the group’s share price could “take a breather” after delivering 8.3% YTD returns and outperforming the STI Index by 17.4%.

The research house nonetheless continues to like Japan Foods for its strong balance sheet, thriving Japanese restaurant franchise as well as the ability to successfully launch new brands.

In a report last Friday, analyst Shekhar Jaiswal says a recent discussion with the group’s management has indicated that weak consumer sentiment, higher costs from launching premium restaurant concepts, and rapid expansion in restaurant numbers could keep Japan Foods’ profitability in check over the next few quarters.

“Amidst weak consumer sentiment and rising competition, Japan Foods witnessed a 10% YoY decline in SSSG for 1HFY19 (Mar). We note that revenue/restaurant for its Ajisen Ramen and Menya Musashi brands have now declined for two consecutive quarters. Both brands accounted for 60% of JFH’s revenue in FY18,” notes Jaiswal.

The analyst has therefore cut the group’s forward earnings estimates for FY19-21 by 13-19% to factor in weak same-store sales growth (SSSG), lower gross margins and higher opex, all of which come amid expansion in the number of restaurants.

On a more positive note, Jaiswal highlights the possibility of the group making an earnings-accretive acquisition in Singapore or within the region, considering Japan Foods’ net cash position and zero debt.

“Below-industry-average valuations and ability to maintain +4% yield should support the share price at current levels, though,” he adds.

As at 11.55am, shares in Japan Foods are trading 1.1% lower at 46 cents or 2.1 times FY19F book value.