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Spicy Cha Shu Ramen

KGI Securities Initiation Report – Japan Foods Holding

 Attractive dividend yield above peers, supported by steady and resilient growth

We initiate coverage on Japan Foods Holding Ltd (Japan Foods) with a BUY recommendation and a target price of S$0.56 based on DCF valuation with a WACC of 8.0%. Japan Foods operates a chain of 50 restaurants in Singapore, mainly specialising in Japanese fare that is being offered under various franchise F&B brands. Its core competitive strength lies in its extensive portfolio of F&B brands and efficient centralisation of food production, allowing the company to expand steadily despite slowdown in the F&B restaurant space. Japan Foods is currently trading at a 21x FY16 P/E that is below peers’ average of 37x, along with an enticing dividend yield of 4.5%. Our target price implies an 18x FY18F P/E, with net cash contributing 16% to our valuation.

Steadily expanding outlets and sales since IPO in 2009. Japan Foods has consistently expanded its network of restaurants since listing with sales turnover growing at a CAGR of 9.4% over FY2009-FY2016 despite slower industry sales increasing competition. This was achieved through prudent restaurant portfolio management, whereby Japan Foods is able to test out restaurant concepts at various retail malls and convert underperforming outlets to another brand that will better suit the location and thus, improve same-store sales.

Progressively advancing profitability from economies of scale. Due to efficient centralisation of food production at its central kitchen and product pricing strategy over the years, Japan Foods has seen gross margin improving from 74% in FY2009 to 84% in FY2016, a level that is highest amongst its listed peers. Synergies amongst its franchise brands have also led to cost savings from bulk purchases of food ingredients – similar ingredients that are used to prepare tonkotsu (pork) broth for its Japanese ramen restaurants as well as pork bone soup for its “New ManLee Bak Kut Teh” outlets.

Generously rewarding dividends while accumulating cash. Japan Foods has consistently handed out dividends annually since listing and its DPS grew at a CAGR of about 39% from FY2009 till FY2016. We believe Japan Foods would be able to increase its dividends in line with earnings growth over the near-term. In addition, Japan Foods has been accumulating net cash so as to minimise the cost of raising additional funds when a suitable investment opportunity to pursue further growth arises, potentially leading to further dividend growth.

Key Risks: Rising labour costs and rent expenses, macro-economic risk, non-renewal of franchise agreements.

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