It’s about 1 year 1 month after my first post on Japan Foods. One year ago, I estimated its fair value at 0.43 and bought it at 0.39 per share (see this post).
Good First Half of FY17
After its good FY17 Q1 (operating profit +30% yoy) and Q2 (operating profit +0.5% yoy) result, I adjusted my valuation up to 0.45 per share (see this and this). The share price momentarily went up to 0.455 before falling to 0.40 in December 2016. After such a strong first half result, the share price remained so low, so I bought extra shares at 0.40.
Continued good Q3
Q3 did even better with operating profit +68% yoy. That made 9M17 revenue +6.7% yoy and operating profit +28.8 yoy. Again, I adjusted my valuation up to 0.48. Its share price rose to 0.46 shortly after. In March 2017, it fell back to 0.425, and I sent my order to buy more at 0.425, but unfortunately, I could not get any fill.
New Coverage by KGI
In April, its share price rallied to 0.49 after KGI Research initiated a coverage on Japan Foods with price target of 0.56. Interestingly, in my more optimistic scenario, my estimate is actually around 0.55, close to KGI’s base case price target. KGI’s bull case price target is 0.64, while its bear case is 0.48, matching my base case.
Basically, like in all cases, our differences in valuation are on assumptions. I can’t say whose assumptions are better or more realistic. Japan Foods has good management, and can continue to surprise positively.
But one thing caught my attention. KGI’s assumption on capex is 4.4m forever, while its depreciation rose from 5.3m in FY17 to 6.6m in FY21. I thought that’s not realistic to assume that capex (maintenance + growth) is lower than current and future depreciation.
On the day of rally, I decided to sell out at around 0.48, which is my fair value estimate. My first purchase at 0.39 achieved around 28% return (including dividends of 2 cents). My second purchase at 0.40 achieved nearly 20% return. That’s satisfactory return for holding period of one year or less.
I made many mistakes of selling too early last year and this year. Way too many. In several cases, holding just another 1-2 months could get additional 10-30% return. Japan Foods is going to release its full year result this month and is likely to post continued growth in revenue and profit. I hope I don’t end up making another mistake of selling too early.
Source: Google Finance