Japan Foods FY17 Q2 results

FY17 Q2 (July – Sept) financial result is within expectation. Q2 revenue rose by 4.7% yoy to 16.65m, but operating profit was up by 0.5% only due to rising costs. Blending with the outstanding performance from Q1, overall H1 achieved a good result: revenue +5.5% yoy to 33.5m and operating profit +14% yoy to 2.95m.

Its main flagship brand, Ajisen Ramen, continues its downslide, while its various other brands pick up the slack. Its new brand, “New ManLee Bak Kut Teh” is doing decently and JFH plans to invest more in this brand going forward. I visit AMK Hub mall regularly and notice that there are fewer patrons taking meals at New ManLee compared to several months ago. Hope this new normal is still generating decent return for the outlet (at least, don’t deteriorate further).

Q2 generated Free Cash Flow (FCF) of 1.9m. For H1, FCF was 4.3m. I expect FCF for H2 to be substantially lower. Overall, the FCF remains good and continues to create value for the Company. Hence, cash has increased from 17.3m to 19.5m.

For outlook, there is nothing new. Operating environment remains challenging (it’s always challenging) with intense competition (always intense), tight labor supply, rising costs and uncertain economic outlook (it’s never certain).

I adjusted my valuation up slightly to 0.45 per share. For more optimistic case, my estimate is 0.51 per share. At current share price of 0.41, there isn’t much margin of safety, but I feel comfortable holding this stock and wait for market to adjust the price towards its fair value. In the meantime, the Company continues to create value by generating FCF and returning some of it in the form of dividends to shareholders.

In its 30th June 2016 report on Japan Foods, CIMB lowered its target price from 0.53 to 0.51 per share. I don’t usually rely on the target price of sell-side analysts. In this particular case, I think the target price is quite optimistic. But, let’s hope they are right.


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