• NEUTRAL, new TP of SGD0.26 from SGD0.29, 0% upside with c.2% FY25F (Mar) yield. Japan Foods’ FY24 PATMI was well below our forecast, amidst higher-than-estimated operating costs. Its halal-concept restaurants have seen strong growth in outlet count and revenue. It plans to take a breather in expanding its restaurant and café network, and focus more on improving the profitability of its existing outlets. It has lowered dividend payouts, and is now in cash conservation mode. We cut FY25-26 earnings estimates by 9– 11%, as we expect cost pressures to be sustained.

• 2HFY24 saw a recurring net loss. Based on our estimate, JFOOD reported a recurring loss of SGD1.2m in 2HFY24 (Mar). This led to negative full-year recurring earnings, ie a loss of SGD0.3m vs a profit of SGD4m in FY23. Although its GPM remained healthy at 84.7%, higher labour, utilities and depreciation costs led to a material rise in operating costs – which, in turn, resulted in an operating loss.

• More cautious on adding new outlets. JFOOD recorded net additions of six, nine and 14 outlets in FY22, FY23 and FY24. For the current financial year, it aims to take a breather on expanding its outlet count. We estimate a net addition of just one outlet in the halal segment for FY25. This should lead to lower capex requirements compared to the last two years, when the capex was around SGD8-9m. JFOOD will continue to replace its ailing brands and concepts with new ones, in both the halal and non-halal segments.

• Halal segment is the star; focus on cost control. Management indicated SSSG turned negative in FY24. Despite a higher outlet count, the non-halal segment’s total revenue and revenue per outlet declined by 13% YoY and 15% YoY in FY24. The saving grace was the halal segment, where total revenue and revenue per outlet grew by 55% YoY and 3.4% YoY. To offset some labour cost pressure, JFOOD plans to introduce a pay-at-the-table option for its customers in the near future.

• Cash conservation. To prepare for uncertain market conditions, JFOOD has adjusted its dividend policy from paying 100% of earnings to paying at least 50% of its earnings as dividends. During 2HFY24, JFOOD also sold its club membership for a cash gain of SGD0.5m. This revised dividend policy, lower near-term capex, and strong operating cash flow generation ability should lead to a gradual rise in its cash balance

• Unchanged ESG estimate. Our TP includes a 2% discount applied to the JFOOD’s fair value, given that its ESG rating of 3.0 is below the country median of 3.1.

Source: RHB Research - 29 May 2024