Can This Hidden Growth Stock Continue Its Rise?  

Japan Foods Holding Ltd (SGX: 5OI) has been an outperformer over the last five plus years. The company recorded capital gains of about 293% from 1 April 2010 to its closing price on 25 November 2014. By comparison, the capital gains of the SPDR STI ETF (SGX: ES3) was 14.2% for the same duration. The SPDR STI ETF is a proxy for the Straits Times Index (SGX: ^STI). During the same timeframe, the company also distributed a total of about 8 cents per share in dividends.

While Japan Foods has been giving out delicious returns, as Foolish investors, we should look behind the curtains to understand how is can continue to grow.

A closer look

As its name suggests, Japan Foods has a suite of Japanese themed food concepts under its company umbrella. Foolish folks may have come across one of its 15 different restaurant brands (some are actually franchised from Japan while some are self-owned) like Ajisen Ramen, Fruit Paradise, Menya Musashi and Osaka Ohsho. Outlets in Singapore are self-operated, while restaurants in Malaysia, Vietnam, Hong Kong, and China are either sub-franchised or associates.

Can this hidden growth stock continue its rise?  Japan Foods -1

Source: Company Earnings Presentation

In the five financial years shown above, Japan Foods has grown its sales from $43.7 million in the financial year ended 31 March 2010 (FY2010) to $62.8 million in FY2014. From the graph above, we can see that Ajisen Ramen is the mainstay of Japan Foods’ revenue base. In FY2014, Ajisen Ramen made up 48.5% of the company’s revenue. This is followed by Menya Musashi, Fruit Paradise, and Osaka Onsho which made up 8.8%, 7.7%, and 7.2% of FY2014’s sales. Majority of its sales growth over the past five financial years came from the aforementioned quartet, with Menya Musashi being the biggest contributor.

Can this hidden growth stock continue its rise?  Japan Foods -2

Source: Company Earnings Presentation

From a store count point of view, the mainstay again has been Ajisen Ramen which had 19 self-operated outlets and 7 franchisees at the end of FY2014. This is followed by Menya Musashi which had 15 self-operated and franchised outlets in total.

To get an idea on how Japan Foods achieved its revenue growth, the company had grown from 49 outlets in FY2011 to 59 outlets in FY2013. But to get there, it actually closed 27 outlets and opened 37. This suggests that the Japanese restaurant operator performs rigorous experimentation to figure out what works best.

Foolish summary

The exercise above is to look at the sales growth alone. Moving forward, we should also observe if the topline growth trickles down to the bottom-line. But, that’s for another article.

Japan Foods remains a relatively small restaurant operator with which has managed to grow its revenue over the past five financial years. This has been achieved through a process of experimenting with different concepts, and converting those which did not work out to another new concept. One of the highlights has been the growth of Menya Musashi from a standing start to 15 outlets in less than three years. With its track record as a franchisee, Japan Foods also offers new restaurant concepts in Japan a proven possibility to expand their franchises outside Japan.

As of the closing price on 25 November 2014 of $0.55, Japan Foods traded at a trailing price/earnings ratio of about 17.9, and has a dividend yield of around 4%. To learn more about Japan Foods, read the second part of this series here.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.