Brokers’ take: RHB raises Japan Foods target to S$0.65 as halal segment beats expectations

RHB Research on Monday (May 29) increased its target price for Japan Foods to S$0.65 from S$0.60, as it expects the company to report stronger near-term profits on the back of improving net margins and an expansion.

The research house maintained its “buy” recommendation on the Catalist-listed company, which operates restaurants including Ajisen Ramen and Tokyo Shokudo. 

RHB’s higher target price accounts for an 8 per cent to 9 per cent increase in forecast profits for FY2024 and FY2025, after the group last Tuesday reported strong FY2023 results. 

“While Japan Foods paid 85 per cent of its net profit as dividends in FY2023 – we expect it to maintain close to 100 per cent dividend payout during the forecast period (FY2024). This implies a dividend yield of 5 per cent,” said analyst Shekhar Jaiswal. 

He views the stock’s current valuation – which stands at an ex-cash price-to-earnings ratio of 10.4 times based on FY2024 estimates – as “compelling”, given Japan Foods’ “robust growth potential”. 

RHB is particularly bullish on the group’s halal segment, which was a key driver of revenue growth in FY2023. In its view, this segment can expect increased operational efficiency with the introduction of a central kitchen. 

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While the company’s full-year revenue for FY2023 came in ahead of RHB’s expectations, Jaiswal noted that its bottom line was dragged by higher selling, operations, and lease interest expenses. 

He nonetheless forecast FY2024 net margin to improve to about 6 per cent from 4 per cent, as inflationary pressures are expected to ease. 

Revenue for the fiscal year ahead is projected to come in at a year-on-year growth of 7 per cent, he said, as the company continues to expand. 

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With the reopening of regional economies, RHB expects increases in overseas ventures’ earnings to be another key driver of growth for Japan Foods. 

As at 1.26 pm on Monday, shares of Japan Foods traded flat at S$0.435.