Japan Foods Holding

Japan Foods Holding | Buy

May 3 close: S$0.505

Target price: S$0.63

RHB Research, May 4

Japan Foods Holding's (JFH) multi-brand concept allows it to capture wider consumer segments and continually cater to changing consumer tastes. This strategy has made JFH very popular with landlords and has allowed it to maximise its revenue on a per restaurant basis.

We assess that JFH could open 4-5 new restaurants each year during FY19-20 (March). Improving revenue per store for its key brands on improving consumer sentiment and continued focus on cost control should enable JFH to deliver annual earnings growth of 10-15 per cent.

It is also looking to grow overseas, having aggressively expanded into Hong Kong and China through investments in associates during FY13-17. The company is in discussions to set up a JV in Indonesia, a market where it has not had a presence since 2015.

JFH's dividend yield of 4 per cent is the highest amongst SGX-listed peers. Given its strong FCF (free cash flow)-generation ability, we believe there is potential for further upside. While net margin of 7.1 per cent may not be the highest in the industry, it is still superior to that of most peers. We believe margins could expand further in FY19-20.

JFH is trading at a FY19F price/earnings (P/E) of 14.8 times, which is at a significant discount to the industry's two-year P/E average of 19.5 times. Given the strong growth outlook and superior financial metrics, we believe it deserves to trade closer to the industry average, if not higher.

Key risks include rising labour costs and rental expenses, lower consumer spending, and non-renewal of franchise agreements.

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