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Japan Foods: A Food For Thought
Ogling at the Japanese ramen outside “Menya Musashi”, I joined the seemingly unending queue formed by a horde of people queuing outside the restaurant.
No one seemed to mind, and neither did I. Such is the case of a Japanese ramen’s fan undying love for that bowl of Japanese noodles.
Menya Musashi, along with 15 other Japanese restaurant brands such as the ever popular Ajisen Ramen and Japanese Gourmet Town, form the portfolio of restaurants under Japan Foods Holdings.
Just like that savory Japanese ramen fancied by many taste buds, in the world of investing, the flavour of the town falls in companies which establish a duality of a strong business model packaged with a strong suite of numbers on their balance sheet.
Japan Foods operates more than 50 restaurants in five countries with majority of its operations concentrated in Singapore.
Apart from several franchise brands brought over from Japan, its long-standing experience in the food and beverage industry has put the company in good stead as it began developing its own brands. In 2013, within a span of one year, the company’s homegrown restaurant, Menya Musashi, has already sprouted five stores in Hong Kong.
Its deceivingly simple recipe of success can be found in its annual report which the company deemed as the four-pronged strategy. In short, the company seeks to grow via the development of new concepts, overseas expansion and opening new outlets, while managing its costs and food quality, and most importantly, a stringent diet of shutting down non-profitable outlets.
Sharing vast similarities to an exercise routine, the key is to stick to one’s recipe of success, with conviction, which Japan Foods has received a tick.
The company scores very well in terms of profitability measures as they trumped the industry average by maintaining a gross profit margin of above 70 percent, for a five-year period between 2009 and 2013. In addition, return on equity and return on assets averaged 15.1 percent and 24.2 percent respectively.
A set meal would not be complete without a look at its balance sheet. Japan Foods has no debt on its balance sheet as of 1H14. Cash position is a lofty $18.3 million, providing more than sufficient room for the company to pursue further growth through acquisitions. Sweetening the deal further, excluding a special dividend paid in 2013, dividends paid out by the company have grown at a compound rate of return of 56.9 percent to $0.019 for a five-year period since 2009.
Investment Merits
Strong balance sheet with no debt and a relatively large pile of cash
Management established a long standing track record of prudent expansion backed by robust profitability
Cost control measures that are proven successful through backward integration to include a central kitchen which generates cost control synergies
Investment Risks
The food and beverage industry is extremely competitive
Valuation has almost doubled since a year ago
From a portfolio perspective, business model is concentrated in Japanese food without diversification
SI Research Takeaway
Borrowing words from a renowned investor, Peter Lynch, “Never invest in any idea you can’t illustrate with a crayon,” barring any unforeseen circumstances, given the simplistic yet results proven strategies of Japan Foods, one can expect to observe further consistency in the company’s performance moving forward.
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