RHB lowers Japan Foods’ TP to 45 cents on cost pressures

RHB has also lowered its profit estimates for the FY2024 to FY2026 by 37% to 50% to account for the higher operating costs.

RHB Bank Singapore’s Shekhar Jaiswal has kept his “buy” call on Japan Foods 5OI as he expects the company to register strong sales growth thanks to the expansion of its halal restaurant brands.

In the 1QFY2024 ended June, Japan Foods reported a net addition of two restaurants largely in its halal segment, which saw “strong customer demand and growth in revenue contribution”.

“Since the first halal concept restaurant opened in November 2020, it has rapidly expanded this segment to 29 halal concept restaurants under various brands as of June 30,” the analyst writes.

“In July 2023, the company launched a self-developed new brand Godaime, specialising in maze soba or dry ramen. It also launched Tori Sanwa, a 120-year-old brand serving Nagoya chicken rice bowl in August 2023,” he adds.

That said, Jaiswal has lowered his target price to 45 cents from 65 cents previously with the company’s lower-than-expected earnings for the 1QFY2024 ended June.

“While 1QFY2024 gross profit was in line, net profit significantly missed estimates due to higher-than-expected selling and distribution (S&D) expenses,” the analyst writes. Although these expenses are expected to decline over the FY2024 amid slowing economic growth and moderating inflation, they are still likely to come in higher during the fiscal year, he adds.

To this end, Jaiswal has also lowered his profit estimates for the FY2024 to FY2026 by 37% to 50% to account for the higher operating costs.

Overall, the analyst remains positive on Japan Foods as he expects the company to main a dividend payout ratio of close to 100% during his forecast period. The ratio implies a dividend yield of 5% at Japan Foods’ current share price.

“We believe [the dividend payout ratio and yield] will provide strong support to its share price at current levels,” he writes.

As Japan Foods’ environmental, social and governance (ESG) score is at 3.0, in line with RHB’s country median, Jaiswal’s target price doesn’t have an ESG premium or discount to the company’s fair value.

As at 11.53am, shares in Japan Foods are trading 0.5 cents higher or 1.27% up at 40 cents.

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