RHB Group Research analyst Shekhar Jaiswal has reiterated his “buy” call for Japan Foods Holdings with an increased target price (TP) of 60 cents from 55 cents previously.
In his report dated Nov 18, Jaiswal highlights that the easing of Covid-19 measures since early-2022 was an inflection point for Singapore’s food and beverage (F&B) industry which saw Japan Foods booking “stellar earnings” for 1HFY2023.
The analyst says he is also “upbeat” on its recent expansion into halal restaurant brands and believes the company has the potential for significant growth. “We expect strong growth over FY2023 to FY2025, with profit quickly reverting to pre-pandemic levels despite rising cost inflation,” he says.
For the period ended September, the company’s revenue increased by 80% year-on-year (y-o-y) to $38 million and reversed into profitability with earnings of $2.3 million, compared to a loss of $1.6 million in the same period last year.
Revenue and reported earnings accounted for around 55% and 65% of his estimates respectively, while the company’s gross margin widened to 84.7% from 83.8% in 1HFY2022, despite the inflationary environment. To manage the rise in input costs, Jaiswal says Japan Foods is gradually passing on higher costs to customers by raising its prices and that he has increased his FY2023 to FY2025 earnings by 7% to 9%.
For Jaiswal, this makes for a “compelling” valuation. “We believe Japan Foods’ FY2024 price-to-earnings ratio (P/E) of 15x does not do justice to our expectation of its strong return to pre-pandemic profitability. On an ex-cash basis, the stock is trading at 12x FY2023 P/E, which is quite compelling,” he says, noting that his TP was derived without any ESG premiums or discounts to the stock’s intrinsic value.
“In addition to the strong revival of its revenue and profits, we are upbeat on its recent expansion into halal restaurant brands and believe that the company has the potential for significant growth. We expect strong growth over FY2023 to FY2025, with profit quickly reverting to pre-pandemic levels despite rising cost inflation,” Jaiswal adds.
Japan Foods has expanded its halal restaurant offering and doubled the number of its halal restaurants from six in 1HFY2022 to 12 in 1HFY2023, while also expanding its portfolio of halal brands to a total of five as at October 2022. The analyst notes that the revenue contribution from halal restaurants has also increased over the last year — this segment accounted for 25.2% of total revenue in 1HFY2023, with halal brands contributing a $6.4 million net revenue y-o-y increase in 1HFY23 to $9.6 million.
Meanwhile, Jaiswal says that the company will look to expand into Japan. “As of end-1HFY2023, Japan Foods had no borrowings and a cash balance of $23.5 million or 30% of its market cap. While it believes this large cash balance gives it a buffer to survive any unexpected decline in economic activity, we assess that the company may invest in growing its business presence in Japan over FY2024,” he says.
Japan Foods declared a 1 cent interim dividend per share (DPS) for 1HFY2023, compared to 0.5 cents for 1HFY2022, although Jaiswal notes the company has historically maintained a high dividend payout ratio — for FY2018 to FY2020, its dividend payout ratio stood at 68% to 214%.
“Japan Foods announced that 100% of net profit would be paid as dividends in FY2022, which we expect it to maintain in the forecasted years. We also estimate its dividend yields at more than 5% for FY2023 to FY2025,” he notes.
As at 10.51am, Japan Foods traded flat at 42.5 cents with a dividend yield of 5.53%.