KGI Securities believes that Japan Foods Holding has emerged from the pandemic stronger and primed for better days ahead, prompting analyst Joel Ng to upgrade his call to “outperform”, with a higher target of 65 cents from 46 cents previously.
Ng commends Japan Foods’s adaptability throughout the pandemic, noting it operated only 13 restaurants at the start of the circuit breaker last year catering to takeaways, before increasing this to 30 in restaurants in May 2020.
While the company had to close 9 restaurants due to the Covid-19 impact and currently operates a total of 50 eateries as of March, Ng highlights that Japan Foods took the opportunity to launch two new brands, including its first foray into halal-certified eateries under the “Tokyo Shokudo” brand.
As a result of the circuit-breaker, Japan Foods’s FY2021 ended March results saw revenue decrease 25% y-o-y to $51 million due to impacted performance primarily in the first half of the financial year. However, thanks to government grants and rental concessions, net profit grew to $3.6 million, up 256% y-o-y.
In addition, Ng points out that Japan Foods’s 2HY2021 revenue recovered 75% on a sequential basis to near pre-pandemic levels at $32.4 million, while gross profit margins remained consistent.
He also points out that the company saw the first profitable quarter from its associate companies in the 2Q2021 after four consecutive quarterly losses, mostly driven by the “Hototogisu” brand in Hong Kong and the “Menya Musashi” brand in China. “In total, JFOOD’s share of profit in FY2021 was $33,000, a turnaround from a loss of $0.3 million in FY2020,” he says.
With the ongoing Covid-19 situation, Ng believes a complete recovery for the Singapore restaurant industry may still take at least a year, noting that the Singapore Restaurant Index still remains below pre-Covid levels.
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Nonetheless, he believes that the worst is behind for Japan Foods, and the company is poised to ride the upside as the economy recovers, supported by a “sizeable” cash balance of $23 million (33% of its current market capitalisation) underpinned by free cash flows averaging $1 million per quarter.
“Japan Foods declared a 1.75 cents final dividend for FY2021, which is 7 times higher than FY2020. This increase brings the full-year dividend to 2.5 cents compared to 1.25 Sing cents in FY2020. The implied dividend yield is an attractive 5%,” Ng remarks.
Looking ahead, he is bullish on Japan Foods’s move into the halal dining scene. “With the growing population in Singapore and the rise in the number of Muslims, we expect Japan Foods’s halal arm to take off in the coming years and boost both the top and bottom line,” he says. He notes that the company has opened two halal Tokyo Shokudo eateries, with plans to open another four more outlets by the end of 2021.
In addition, Ng is upbeat on Japan Foods’ expansion into Japan via its joint venture with Minor Food Group (Singapore). While the partnership was meant to commence store openings in Japan, these have been delayed due to the pandemic.
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However, Ng see light at the end of the tunnel, given the decrease in Japan's Covid-19 cases and the increasing vaccination rates. "Once Japan Foods can operate in Japan and a new revenue stream is established, we foresee growth in the medium term," he remarks.
Risks to his call include circuit breaker or lockdowns due to rising Covid-19 cases, as well as rising food costs due to inflationary pressures.
As at 11.20am, shares in Japan Foods are down 0.5 cents or 1.18% lower at 42 cents.
