Brokers’ take: RHB downgrades Japan Foods to ‘neutral’ as operational costs stay elevated

RHB on Friday (Dec 8) downgraded Japan Foods : 5OI 0% to “neutral” from “buy”, after the food and beverage group’s H1 2024 core earnings fell “well below” its estimates amid elevated operating costs, which could persist until the second half of 2024.

“We believe Japan Foods’ higher operating costs were an outcome of a delayed impact of the elevated inflation that was noticed early this year, as well as the rapid expansion in store count,” the research team said in a report.

RHB also cut its target price by a third to S$0.30 from S$0.45. It noted that the stock is trading at 13 times its ex-cash earnings, compared with its historical average of 13.5 times. Its peers are trading at a forward price-to-earnings ratio of around 11 to 13 times.

The research team continues to be cautious about Japan Foods’ FY2025 profit outlook, although the group’s plans for outlet expansion could provide a surprise upside.

Notably, the group’s store expansion was driven mostly by its halal restaurants, which now make up around half of Japan Foods’ restaurant portfolio, and about 45 per cent of its revenue for H1 2024, from 25 per cent for H1 2023.

“Its top two performing halal-concept brands generated the highest revenue growth among all its brands in H1 2024,” RHB said. It expects the segment to account for over 50 per cent of Japan Foods’ revenue by the end of FY2024.

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On the other hand, the addition of new stores, coupled with manpower constraints, could keep operating costs high in the near term. More new stores could also lead to higher-than-normal capital expenses, and elevated depreciation expenses, RHB added.

Japan Foods’ franchised brands include Ajisen Ramen, Menya Musashi, Akimitsu and Michelin-star brand Nakiryu. Its self-developed brands include Fruit Paradise and Japanese halal-concept restaurant Tokyo Shokudo. Its counter last traded at S$0.31 on Dec 6.