SINGAPORE (Mar 8): RHB Research is staying “neutral” on Japan Foods with a lowered target price of 45 cents from 48 cents previously.

In FY19, the group is expected to see profits dragged lower due to its ongoing rationalisation of stores and moderating consumer discretionary spending amid slowing economic growth.

Although the group may be seen increasing its efforts to improve operational efficiencies, expanding its regional presence, refreshing ageing brands and launching new franchise brands, near-term profits may still be depressed due to intense competition and tight labour supply.

In the latest Singapore Budget 2019, Finance Minister Heng Swee Keat flagged that the F&B business is labour intensive, while announcing a reduction in foreign worker dependency ration ceiling (DRC) for the services sector.

The new DRC of 35% (from 40% currently) for foreign workers in a company in the services sector will be implemented progressively until 2021.

In a Friday report, analyst Shekhar Jaiswal says, “In an already tight labour market, further reduction in DRC will make it difficult for F&B players to grow their businesses. Moreover, the need to improve productivity and implement technological solutions will lead to higher costs.”

Amid weak consumer spending, the group continues to practice good restaurant portfolio management, by taking into account market demand and the individual restaurant’s profitability.

In the last 12 months, it closed two Ajisen Ramen restaurants and has temporarily closed one restaurant for re-sizing of floor space. In FY18, this brand accounted for about 40% of its total revenue. For other key brands, revenue declined y-o-y during 9M19 due to negative same-store sales growth.

In Dec 2018, the group entered into a 50:50 joint venture with Minor Singapore, which will allow it bring Minor’s Thai restaurants to Japan, while Mino will expand Japan Foods’ brands in Thailand and China.

See: Japan Foods announces regional expansion in partnership with Minor Singapore

“While we are yet to incorporate the earnings impact, we remain upbeat on the JV as it will make it possible for Japan Foods to leverage on operational strengths and industry experience of a strong partner and grow its business outside Singapore,” says Jaiswal.

Nonetheless, the analyst believes that a net cash balance sheet, strong FCF generation and about 5% yield should provide support to Japan Foods’ share price.

In the consumer space, RHB’s preferred pick is grocery retailer Sheng Siong. The research house has a “buy” call on the stock with a target price of $1.25.

As at 3.20pm, shares in Japan Foods are trading at 43 cents or 2.1 times FY19 book with a dividend yield of 4.2%.