Japan Food

UOBKayhian on 4 June 2013

Valuation

·      Japan Food (JFood) is trading at 9.1x FY14F PE based on Bloomberg consensus estimates of 1.0% earnings growth.

·      Share price catalysts include regional expansion, development of new brands with improving margins as well as maintaining a consistent dividend policy of 35% of profits.

Investment Highlights

·      JFood, together with sub-franchisees and franchisees, operates a total of 52 restaurants inSingapore, Malaysia, Indonesia and Vietnam under 9 franchise brands from Japan. Some of these brands include Ajisen Ramen, Botejyu, Aoba, Menya Mushshi and Kazokutei. The group has also developed six brands under Aji Tei, Fruit Paradise,Japanese Gourmet Town, Udon King, AjisenGourmet Town and Tokyo Walker.

·      Net profit for FY13 rose 72.3% yoy to S$6.4m on higher revenue and stronger margins. Revenue gained 9.3% to S$61.3m on better sales from Ajisen Ramen and new brand Menya Musashi. The group also recorded higher gross profit of S$49.1m with gross profit margins improving to 80.1% (1H12: 78.3%) as the group recorded more sales through higher margin stores.

·      The group will also be actively seeking new partners to expand in the region including Malaysia,Indonesia and Vietnam. JFood has also declared a final dividend of 1.0 S cent for 2H13 and a special dividend of 0.6 S cents, which brings the total dividend for the year to 2.5 S cents. This translates to a dividend yield of 4.8%.

Our View

·      JFood came across to us as a company that is able to deliver earnings via strong brand management and cost control. A simple screen on various listed food companies revealed that most companies experienced either lower profits or a narrowing of net profit margins. These companies had experienced similar challenges, which include increased raw material prices, labour costs and rentals from landlords.

·      However, JFood had reported stronger top-line and bottom line growth with higher margins driven by newer restaurant brands and menus coupled with lower costs from its own Ramen noodle productionfacility.

·      The group has also expanded into China through a JV with Ajisen Investments (International) Limited, an indirectly wholly-owned subsidiary of Ajisen (China) Holdings Limited. JFood will hold a 20% shareholding interest in the JV company and will be involved in operating the Menya Musashi restaurants in China.

·      JFood had also recently launched the Osaka Ohsho restaurant in Raffles City Shopping Centre. The Osaka Ohsho restaurant started off in Japan as a gyoza specialist shop in 1969, and currently has over 300 outlets operating in Japan.