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RHB maintains ‘neutral’ on Japan Foods Holdings at lowered target price of 26 cents

Douglas Toh
Douglas Toh • 3 min read
RHB maintains ‘neutral’ on Japan Foods Holdings at lowered target price of 26 cents
RHB's Jaiswal notes that the company will aim to slow down in its outlet expansion strategy for the FY2025. Photo: Albert Chua/ The Edge Singapore
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RHB Bank Singapore analyst Shekhar Jaiswal has kept his “neutral” call on Japan Foods Holdings but with a lowered target price of 26 cents from 29 cents previously, after the company reported a loss for FY2024 due to higher operating costs.

The company, which operates a chain of F&B outlets, has reported a loss of $300,000 for the year ended March, reversing from earnings of $4 million recorded the year earlier.

“Based on our estimate, Japan Foods reported a recurring loss of $1.2 million in 2HFY2024,” writes Jaiswal in his May 29 note.

While its gross profit margin “remained healthy” at 84.7%, higher labour, utilities and depreciation costs led to a material rise in operating costs, resulting in an operating loss.

Having added 14 outlets in FY2024, Jaiswal believes that Japan Foods will now “take a breather” on its continued outlet expansion.

“We estimate a net addition of just one outlet in the halal segment for FY2025. This should lead to lower capital expenditure (capex) requirements compared to the last two years, when the capex was around $8 million to $9 million,” writes Jaiswal.

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Besides a slower expansion pace, Japan Foods is seen to continue to replace its “ailing” brands and concepts with new ones, for both its halal and non-halal segments.

In the FY2024, management indicated that same-store sales growth (SSSG) turned negative, as its non-halal segment’s total revenue and revenue per outlet declined by 13% y-o-y and 15% y-o-y respectively, despite a higher outlet count.

In contrast, the “saving grace” was the halal segment, where total revenue and revenue per outlet grew by 55% y-oy and 3.4% y-o-y, says Jaiswal.

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To offset some labour cost pressure, Japan Foods plans to introduce a pay-at-the-table option for its customers in the near future, he adds.

Given uncertain market conditions, the company has adjusted its dividend payout ratio from 100% of earnings to just “at least half”. 

“During 2HFY2024, Japan Foods also sold its club membership for a cash gain of $500,000. This revised dividend policy, lower near-term capex, and strong operating cash flow generation ability should lead to a gradual rise in its cash balance,” writes Jaiswal.

Nonetheless, he has cut his FY2025 to FY2026 earnings estimates by 9% to 11%, as he expects cost pressures to be sustained.

Key upside risks noted by Jaiswal include lower-than-estimated operating costs, strong performance of its halal concept restaurants and reduced food and beverage (F&B) competition in Singapore. 

Conversely, downside risks include weak economic growth leading to a sharp slowdown in consumer discretionary spending.

As at 2.00 pm, shares in Japan Foods Holdings are trading flat at 26 cents.

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