Brokers' take: KGI upgrades Japan Foods to 'outperform' with higher S$0.65 target price

KGI Securities has upgraded its call on Japan Foods from "neutral" to "outperform" with a higher target price of S$0.65 compared to S$0.46 previously.

The move follows expectations of "better days ahead" now that the worst is over for the Catalist-listed restaurant operator, according to analyst Joel Ng in a report issued Wednesday.

Mr Ng said he believes Japan Foods is in a favourable position to grow and expand its market share given its flexible business model. Given the group's recent FY2021 final dividend of 1.75 Singapore cents, this implies a FY2022 dividend yield of 5 per cent which he deems attractive.

The analyst particularly likes the group's ability to rotate among its restaurant brands and constantly bring in new concepts, supported by what he calls a "rock-solid" balance sheet with a sizeable cash balance of S$23 million, which represents around 33 per cent of its current market capitalisation.

While Mr Ng does not expect the restaurant industry to completely recover to pre-Covid sales in the near term, he remains bullish on the group's growth prospects among its peers.

The analyst highlighted a 75 per cent sequential increase in H2 FY2021 sales after Covid-19 restrictions in Singapore began to ease in June 2020 and December 2020. Additionally, he noted that the group's gross profit margins have remained constant despite the pandemic's onset, ranging from 84.2 per cent to 84.9 per cent from FY2019 to FY2021.

"With the break of dawn brings new opportunities, which the group has taken advantage of to expand into areas such as halal-certified restaurants… For many (restaurants) who survived, we expect (Japan Foods) to thrive," commented the analyst.

He also expects the group's halal-certified restaurants under its new Tokyo Shokudo brand to offer high growth potential.

"With the growing population in Singapore and the rise in the number of Muslims, we expect Japan Foods' halal arm to take off in the coming years and boost both the top and bottom line," added Mr Ng.

Shares of Japan Foods closed 2 Singapore cents or 4.94 per cent higher at S$0.425 on Wednesday.