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Broker's take: KGI Securities starts coverage of Japan Foods; S$0.56 target price

JAPAN Foods' diverse array of food and beverage (F&B) brands and efficient centralisation of food production help it float above the F&B sector's woes, and this makes its shares an attractive buy, said KGI Securities.

As such, it sees Japan Foods' share target price at S$0.56. The counter was at S$0.445 before trading commenced on Monday.

In initiating coverage on the Catalist-listed F&B company, KGI Securities said that despite the slowdown in the F&B sector, Japan Food's core competitive strength lies in its extensive portfolio of F&B brands and efficient centralisation of food production, allowing it to expand steadily.

Since listing in 2009, Japan Foods has consistently expanded its network of restaurants with sales turnover growing at a CAGR of 9.4 per cent from FY2009 to FY2016.

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Efficient centralisation of food production at its central kitchen and product pricing strategy over the years also helped its gross margin improve from 74 per cent in FY2009 to 84 per cent in FY2016, "a level that is highest among its listed peers", said KGI Securities.

Japan Foods has consistently handed out dividends annually since listing and its dividend per share grew at a CAGR of about 39 per cent from FY2009 to FY2016.

"We believe Japan Foods would be able to increase its dividends in line with earnings growth over the near term. In addition, Japan Foods has been accumulating net cash so as to minimise the cost of raising additional funds when a suitable investment opportunity to pursue further growth arises, potentially leading to further dividend growth," said KGI Securities.