Ohaiyo Gozaimasu! Walking along the shopping district over the weekend, I found that Singaporeans’ love for food is transforming into a different face. Gone were the days when local delights like Katong Laksa or Punggol Nasi Lemak would fulfill our insatiable appetite. Today, I cannot help but notice that Singaporeans are demanding more food originating from other cultures. Whether it is Thai, Indonesian or Vietnamese, this trend is exemplified by the increasing number of eateries offering non-local food popping up in our malls.
Even more so are Japanese eateries which are quickly pervading our food scene. In almost everywhere you go, you can be sure to find at least one Japanese food establishment around the corner. After all, who can resist a plate of succulent sashimi or an aromatic bowl of ramen?
After my weekend revelation, inquisitiveness kicked in and I set out to explore exactly how well Japanese food establishments in Singapore are doing. Currently, there are three listed companies riding on Singaporean’s acquired taste for Japanese cuisine: Japan Foods Holding (Japan Foods), Sakae Holdings (Sakae) and most recently-listed RE&S Holdings (RE&S). Which then, amongst the three, is the better Japanese food stock?
Food From The Land Of The East
Sakae, the first to be listed on Singapore Exchange, is no stranger to most Singaporeans. Its Sakae Sushi brand has become a household name since the first outlet was introduced in 1997. Other brands include Sakae Teppanyaki and Halal-certified HeiSushi.
Offering a similar suite of Japanese dining concept to Sakae, RE&S is the latest to debut on our stock market in November last year. Like Sakae Sushi, RE&S’ flagship brand, Ichiban Boshi, also caters the “conveyor belt” sushi dining experience. However, the group’s portfolio has a wider range of offerings that include casual ramen Men-ichi, Japanese Yakitori Sumiya, Japanese-Italian fusion pasta Kabe No Ana, and a highly popular all-in-one Japanese buffet restaurant Kushin-bo. In fact, the Japanese Food Street “Shokutsu Ten” in NEX Shopping mall at Serangoon and “Daimon Food Alley” at Jurong Point are operated by the group.
Unlike its peers, Japan Foods Holding is more “noodle-centric”. Its success was founded upon the franchise brand Ajisen Ramen, which is synonymous with affordable quality ramen in Singapore. For more premium quality ramen, the company offerings include Menya Musashi, Menzo Butao and gourmand truffle ramen Konjiki Hototogisu. Other popular brands in Singapore include tart pastry cafe Fruit Paradise and deep fried skewered meathouse Ginza Kushi-Katsu. Like RE&S’s food street concept, Japan Foods also has mixed-concept offerings such as “Japanese Gourmet Town” in Vivocity and “Ajisen Food Town” in NEX.
Which Is More Trendy?
Analysts love to say “Figures don’t lie”. But we also know that figures can also be misrepresented at times. For retail investors who are more skeptical by nature, there is no better business than food establishments that they can “see for themselves”. A little keen observation and one would be able to tell if a restaurant is doing well or not.
For Sakae, the company has been consolidating its Singapore operations, though it is growing in rest of Southeast Asia. Since last year, Sakae have closed more than 10 out of 46 outlets. Some outlets that are still in operation – like the one in Bishan Junction8 – have also downsized from what it used to be. Despite its efforts, there are still days when Sakae Sushi’s outlets are not filled for one seating during peak periods. Typically, a highly successful restaurant could fill at least two seatings during dinner time.
Meanwhile, Japan Foods seem to be faring slightly better. Its flagship Ajisen Ramen – its cash cow – continues to be frequented by students, given its more affordable price point. In the latest FY18, the company’s Singapore portfolio expanded from 49 outlets to 50 outlets. International outlets rose from 18 to 21 during the same period. Meanwhile, contributions from its premium ramen brand Menya Musashi has also increased after the company added three more stores to the existing seven outlets.
As for RE&S, the group only listed in November 2017. However, the group’s offerings probably enjoy the most patronage. At the time of listing, RE&S boasts 72 food outlets in Singapore, with 34 being full-service restaurants. Based on observation, most Ichiban Boshi (full-service) restaurants by RE&S are often packed during peak hours and customers need to queue for their seats. Their mixed food street concepts at NEX and Jurong Point are also crowded even on weekdays.
Which Is More Profitable?
Popularity itself does not always translate to better profitability. In Singapore’s cut throat F&B operating environment, high gross margins and low net margins are a norm. This is due to the high cost structure evolving over the years.
When retailers get hit at malls, property owners revamp their portfolio mix to include more F&B establishments. Yet as supply increases, demand remains relatively stable, making the market extremely saturated. As a result, rent and labour costs continue to rise and F&B operators have to adapt to thin net margins in order to compete.
Amongst our Japanese food counters, Japan Foods operates with the highest operating margins. This is followed by Sakae, which has only recently returned to profitability. RE&S achieved a 72.6 percent gross margin, comparable to Sakae’s 70.5 percent. However, its net margin fell short, as it was impacted by non-recurring listing costs. Prior to its listing, RE&S achieved a higher net margin of four percent in FY17.
Based on recent trading prices, Sakae is trading at the lowest valuation with its trailing 12-months price-to-earnings multiple (P/E) at only 10.8 times. The company has not distributed dividends since 2015 and is sitting on a net debt of $49.8 million on its balance sheet.
On the other hand, Japan Foods is trading at the highest valuation of 15.5 P/E. It is also the largest in terms of market capitalisation, which is at $89.7 million. The company is backed by its net cash position of $21.9 million, which is about 24.4 percent of its market cap. Indicative yield based on the share price of $0.515 is at a respectable 4.1 percent.
As for RE&S, the stock is trading at 14.8 times P/E, slightly lower than Japan Foods. The group intends to pay no less than 35 percent of net profit as dividends to shareholders in FY18. Based on its latest 9M18 results, the group generated $110 million in revenue. By back of the envelope method, we annualise the top line to around $146 million in FY18. Assuming net margin remains at 2.4 percent and a payout ratio of 35 percent, the indicative yield at current trading price of $0.181 is about 1.9 percent. The group is in a net debt position of $2.8 million, with market cap trailing Japan Foods at $64.1 million.
Overall, Japan Foods is superior in terms of profitability, balance sheet strength and yield. However, RE&S offers more potential for growth given its more popular offerings. That said, if you are still undecided about which is a better Japanese food stock, perhaps a walk in town will give you the answer.