Japan Foods

Higher costs seen

RHB Bank Singapore’s Shekhar Jaiswal has downgraded Japan Foods Holdings to “neutral” from “buy” after it reported lower-than-expected earnings for 1HFY2024 ended Sept 30 on higher costs.

Along with the downgrade, Jaiswal, in his Dec 8 note, cut his target price for the company, led by chairman and CEO Takahashi Kenichi, to 30 cents from 45 cents.

Nonetheless, the company, which is actively expanding its number of outlets, might just “yield an upside surprise”.

In his Dec 8 note, Jaiswal points out that the company’s lower earnings for 1HFY2024 were due to the delayed impact of inflation that started earlier in the year.

In 1HFY2024, Japan Foods generated a 13% y-o-y increase in revenue to $43 million. However, higher-than-expected costs sent earnings down 60% y-o-y to $872,000, missing Jaiswal’s projection of $3 million.

In line with the lower earnings, the company cut its interim dividend to 0.3 cents from 1 cent paid out this time last year.

Jaiswal expects cost pressures to persist. Besides the delayed impact of the inflation, the company is incurring costs with its active expansion as well, from 72 outlets at the end of 1HFY2024 to between 77 and 78 by the end of FY2024.

“This, in addition to the manpower constraints, will keep operating costs high in the near term. The addition of new stores would also lead to higher-than-normal capex and elevated depreciation expenses,” warns Jaiswal.

Nonetheless, there are some “bright spots”. For example, Japan Foods has a thriving business selling halal food, with the number of outlets catering to this segment doubling in 1HFY2024.

Two of the halal concept outlets were the ones generating the most revenue growth in 1HFY2024.

Given the promising results, Japan Foods plans to continue focusing its expansion plans on halal-concept restaurants, which it aims to account for more than half of its total revenue by the end of FY2024.

While Jaiswal expects the expansion of its halal restaurants, moderation in inflation and improvement in Singapore’s economic growth to boost earnings, confirmation of this trend will only be visible in FY2025. “Therefore, we prefer to reassess our views post-FY2024 results,” he says.

Taking a conservative stance, he cut his FY2024 and FY2025 profit estimates by 63% and 38% respectively. —