Japan Foods FY18 Q1 result

Japan Foods FY18 Q1 (April – June) financial result: Net profit declined by 20%.

Japan Foods - Financials - FY18Q1.PNG
Source: Japan Foods FY18 Q1 result

First thought, that’s like disaster. But, actually, it’s not really that bad. If we look at the details, the major costs items remain relatively flat.

Japan Foods - Income Stmt - FY18Q1.PNG
Source: Japan Foods FY18 Q1 result

It’s the 3.8% yoy decline in revenue that has direct impact to the bottom line. When the revenue fell by just 3.8% yoy but the net profit plunged by 20% yoy, you know fixed cost is high and margin is small.

If we company 18Q1 result with the same quarters in the past years, I would not say this Q1 is disaster. It’s actually 17Q1 that was doing great, hence, making 18Q1 looked bad.

I don’t pay too much attention to quarterly results. Next quarter result is hard to predict and I don’t try.

When I saw its share price falling to 0.40 this morning, I thought I might be able to buy at dip, but only to realized that the spread was back to 0.415-0.430. So, I’ll just wait at sideline for now.

Peer Comparison

In its Q1 presentation slide, Japan Foods showed this peer comparison. It has one of the highest margins, ROEs, dividend yield, but lowest P/E. It’s also in net cash. These are the reasons why I invested in it last year, not the peers.

Japan Foods - Peer Comparison - 18Q1.PNG
Source: Japan Foods FY18 Q1 result

However, the growth prospect for Japan Foods is really limited, while cost pressure is always there all the time. I will buy the shares only at dip to achieve better than average return.

Q&A with Management

Japan Foods released a Q&A from Securities Investors Association (Singapore) on its Annual Report 2017. If you read the 3-page document, you’ll notice that Japan Foods did not really answer several questions directly. It’s actually not uncommon practice. Many management do give such generic answer, and you’ll have to interpret it yourself. In other cases, the management can be evasive and give you irrelevant answer.

Extract from the report:

Question 1a) Can management help shareholders understand if the higher depreciation and amortisation is a new norm? What are management’s plans to control and limit this? 

[This is also a question that I have in my mind. In my modeling  I assumed that current high depreciation will normalize to a lower rate to give the company a benefit of doubt).

Their reply: The amount of depreciation and amortization corresponds with the expansion in the number of stores over the last few years. In fact, our depreciation and amortisation had fallen as a percentage of our sales last year.

We monitor the performance of individual restaurants very closely and if any restaurant is not performing up to our expectations, we respond quickly by converting it into another brand within our portfolio. In doing so, we will try to save on renovation costs by reusing as much of the existing décor or equipment as possible.

The reply did not answer the question directly. So, you’ll have to interpret it.

When I doing doing M&A last time, the buyer’s due diligence team also asked plenty of questions, some important, some useless. For some questions, our client – the seller – just gave a broad answer or refused to answer altogether. To help our client, we worded the answer nicer, such as “the amount is insignificant”.

Imagine that you are a new analyst without experience. Your fund manager sent you to a meeting to ask company management certain important questions, but the management gave a broad or irrelevant answer, and you couldn’t probe further. How are you going to tell your fund manager that irrelevant answer? You might be wondering if you were doing a poor job. Don’t be stressed out. It’s not uncommon to have such answer.

You might also want to sense if the management is evasive or candid, hands-on or hands-off. This helps you interpret their answer. All this can be learned through experience only, and there is always something to learn.



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