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Japan Foods Holding Ltd SGX: 5OI - Strong Earnings Recovery on the Cards; Still BUY

    Keep BUY and SGD0.55 TP, 31% upside and c.6% FY23F (Mar) yield. Japan Foods’ FY22 reported profit exceeded our estimate. With monthly revenue at its restaurants returning to pre-pandemic levels within the first few months of relaxation of COVID-19 restrictions in Singapore, and JFOOD looking to aggressively grow its number of outlets, we expect strong growth over FY23F-25F, with profit quickly reverting to FY19 levels. Our FY21-22 recurring profit excluded the government grants to make the forecast numbers comparable.

    FY22 earnings in line. FY22 reported profit of SGD3.2m, was significantly ahead of our estimate of SGD2.8m. This was largely aided by a strong recovery in customer footfall across all its restaurants and higher sales intensity for its new halal brand restaurants during 2HFY22. The halal restaurants accounted for c.21% of FY22 revenue. As at Mar 2022, it had 56 restaurants in Singapore (Mar 2021: 50), while the number of halal restaurants increased to nine (Mar 2021: one). JFOOD noted that monthly revenue for its restaurants at suburban malls has reverted back to pre- pandemic levels.

    Return of outlet expansion. The group is looking to add seven new restaurants in FY23, of which five would be halal restaurants. Out of the five halal restaurants, it has already opened two restaurants in the current quarter. We conservatively estimate JFOOD to have 60 restaurants by end Mar 2023. This translates to FY23F capex of SGD4.5m.

    There is cost pressure, but confident of maintaining margin. Growth in the number of outlets would also mean YoY higher operating costs, especially from increased labour and input expenses. However, JFOOD remains confident of being able to sustain its margins due to its efficient central kitchen operations and improved labour productivity. The group is focusing on diversifying its raw material sourcing, while keeping the costs under control. It was able to keep its gross margin above 84% throughout the pandemic (FY22: 84.6%). We estimate FY23 gross margin at 84.4%.

    Large cash balance opens up growth opportunities. As at Mar 2022, JFOOD had no borrowings and a cash balance of SGD23m (c.43% of market cap). It believes this large cash balance gives it a buffer to survive any unexpected decline in economic activity and also provides it with sufficient firepower to aggressively expand the number of outlets in Singapore or regionally, if needed.

    High dividend yield. As disclosed earlier, JFOOD announced 100% of net profit to be paid as dividends in FY22, which it expects to sustain in the future. We estimate its dividend yield at >5% for FY23F-25F.

    ESG. JFOOD’s score is 3.0. As this is in line with the country median score, we ascribe a 0% premium/discount to its fair value to arrive at our TP.

Source: RHB Research - 27 May 2022

https://sgx.i3investor.com/servlets/ptres/15617.jsp

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