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Primed for expansion

• On the road to recovery. While 1H FY2021 revenue increased 15% YoY to S$21.2mn, JFOOD reversed into a loss of S$1.6mn from a slight profit of S$0.3mn in the prior year period. The reversal was mainly due to lower rental concessions and government grants.

• A new dawn. JFOODS operated 52 restaurants in Singapore as at end-Sep 2021, a slight increase from 50 as at end-Mar 2021, but a decline from 59 as at end-Sep 2020. However, we believe the worst is behind us. The break of dawn brings new opportunities, which the group has taken advantage of to expand into areas such as Halal-certified restaurants.

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• Maintain OUTPERFORM but with a lower TP of S$0.56, as we account for a weaker FY2022 due to the delayed reopening plans in Singapore. However, JFOODS is in a favourable position to grow and expand its market share given its flexible business model. We particularly like its ability to rotate among its restaurant brands and constantly bring in new concepts, supported by its rock-solid balance sheet. We thus maintain our OUTPERFORM rating with an unchanged TP.

1HFY2022 Update. While 1H FY2021 (YE March) revenue rose 15% YoY to S$21.2mn, the group reversed into losses of S$1.6mn due to lower rental concessions and government grants. 1H FY2021 revenue of S$21.2mn made up 31% of prepandemic
full-year revenue of S$68.4mn. JFOOD will be paying out a 0.5 Sing cents dividend for 1H FY2021, a reflection of its business confidence in Singapore’s outlook as we go into 2022.

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Better mix. Revenue mix is better diversified now. While Ajisen Ramen’s 29.7% revenue contribution in 1H FY2022 is still the largest, it is down from 35.1% in the prior year period. Other brands that are contributing more include Tokyo Shokudo (15.2% of 1H FY2021 revenue), which is the group’s first-ever Halal certified restaurant that was started in FY2021. JFOODS now has 6 Tokyo Shokudo restaurants (end Sep-2021).

Time to finally reopen. After more than one and a half years of start-stop dining restrictions, we believe Singapore is finally ready to ease restrictions on a more sustainable basis. The recent announcements of the vaccinated travel lane (VTL) for up to 16 countries and easing of restrictions of dining out for vaccinated people from the same household is evidence of the government’s focus to treat Covid-19 as endemic.

The big picture; a brighter 2022. Given Singapore’s open economy, it is important to look at Covid-19 from a global perspective. More than 7.3bn vaccine doses have been administered to almost 4.0bn people across the world, which is equal to around 50% of the world population. At the latest vaccination rate of 30mn doses per day, of which 9mn people are getting their first shot, it will take another 6 months until 75% of the global population receives at least one dose, according to analysis by Bloomberg.

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Furthermore, there are increasingly better treatments for Covid-19. Last week, it was announced that Pfizer’s antiviral oral Covid-19 pills reduced the risk of hospitalisation or death by 89% in patients. Pfizer’s pill follows the successful trial from rival Merck in October. Both companies are now seeking regulatory authorisation. The approval from regulators would be a game changer in the fight against Covid-19, given that Pfizer and Merck’s treatment are pill-based, and are therefore much easier to take for patients.

Valuation & Action: We maintain our OUTPERFORM recommendation but lower our TP S$0.56. The worst is behind, and we expect better days ahead. JFOOD’s business model remains resilient and adaptable. The group has a sizeable cash balance of S$18mn (26% of its current market capitalisation), supported by strong free cash flows averaging S$1m per quarter. JFOODS declared a 0.5 Sing cents interim dividend for FY2021.

Risks: Circuit breaker or lockdowns due to rising Covid-19 cases. Rising food costs due to inflationary pressures.