SINGAPORE (22 July): RHB Research has maintained a “neutral” call on F&B group Japan Foods (JFOOD) with a lowered target price of 33 cents, down from the previous target price of 35 cents.

Analyst Shekhar Jaiswal said even though the government’s support measures will assist in cushioning the short-term impact of the Covid-19 pandemic, adoption of safety measures related to social distancing at Japan Foods’ outlets, as well as weak consumer discretionary spending, will dampen prospects and curtail FY21 growth for the group.

However, he says the long-term trend seems positive, as the group’s net cash balance sheet should enable JFOOD to enhance delivery services and refocus on growth when competition and costs are lower in FY22.

Jaiswal added there will be impairment risks to non-performing outlets in FY21, due to additional costs of imposing safety measures at its outlets – amidst the COVID-19 pandemic – and weak consumer spending.

He notes although JFOOD’s 59 restaurants have resumed full operations with dining-in permitted by the Government, the cushion against the fall in revenue provided by the Job Support Scheme and rental relief should disappear by end 1HFY21, unless existing support measures are extended.

In light of this, Jaiswal believes JFOOD may rationalise its restaurants' portfolio and the number of outlets in FY21. Earlier planned expansions in Japan and other ASEAN markets will also be delayed.  As such, he has lowered his FY21F and FY22F profits forecast by 42% and 26% respectively.

The analyst also notes that although JFOOD’s cash position remains healthy, he expects a lower dividend payout of 75% for FY21, implying a dividend yield of only 1.5%, as compared to the FY20 yield of 6.5% as the group tries to survive in an uncertain economic environment.

Jaiswal says during FY14-19, JFOOD paid out 60-90% of earnings as dividends. In FY20, despite weak earnings, the group paid around 200% of earnings as dividends to reward its shareholders. 

However, he expects dividend yields to gradually increase once earnings recovery kicks in FY22. This is further supported with JFOOD’s strong cash position, which consists of 36% of its market cap. The analyst said this should enable the group to sustain operations beyond the weak FY21F period.

Furthermore, he expects a good number of food & beverage players to exit operations in Singapore in the next 1-2 years, therefore reducing competition for JFOOD.

As at 10.26am, shares in JFOOD were trading flat at 32.5 cents.