How I Made 155.73% Returns in Japan Foods Holdings
Back in 2010 I was screening the stock market and I came across Japan Foods Holdings. You may know them better through their consumer F&B brands – Ajisen Ramen, Aji Tei, Aoba, Fruit Paradise and Japanese Gourmet Town. Japan Foods cleared my investment screening criteria, so I downloaded their annual reports and decided to do a little on-the-ground research.
I visited their various F&B outlets around Singapore and they were always packed with customers. I went a step further and asked my fellow investment analyst, Rusmin, to check out their stores in Jakarta while he was there and to my very pleasant surprise, it was packed with people as well.
So I delved deeper into their numbers. Their profit in 2010 was $4.6 million but the cash flow generated was nearly 50% better – $6.2 million. This gives Japan Foods a cash flow to earnings ratio of 1.35. This means for every dollar of profit made they actually receive $1.35 in cash inflow, which reflects a very high quality of earnings. ROE was an impressive 33% and a very conservative total debt to equity ratio of 0.23. They also have a healthy net cash position of $5.3 million.
I had a few concerns though. Japan Foods’ business model isn’t exactly outstanding; they operate F&B outlets in a rather competitive industry with no obvious economic moat. Japan Foods also IPO’ed really recently in 2009 and hence don’t have much of an established track record.
However they were trading at a very low valuation. Japans Foods’ PE ratio and EV/EBITDA was only 4 and 2.2 respectively (this is really cheap!). I could have bought it there and then based on those deeply discounted valuations but I went a step further and worked out its intrinsic value. Assuming 0% growth (and including its net cash position), Japan Foods’ intrinsic value was $0.42.
So back in 2010 with Japan Food’s stock price trading at just $0.25 (a 48% margin of safety on my intrinsic value), I plonked some of my capital into its shares and decided to track the stock and its management over the coming year.
The following year Japan Foods recorded an impairment loss of $1.6 million. This affected its 2011 net profit; it plunged by 45% to $2.5 million. What brought about this impairment loss? Well, Japan Foods’ business strategy is to launch famous Japanese brands in Singapore to test its viability. If the brand works out, they expand it further. If not they close the non-performing store which results in an impairment loss.
The thing is the impairment loss was a non-cash expense which meant that it was only a paper loss. If you dug deeper and looked at Japan Foods’ cash flow statement, they were making $6.8 million net cash from operating activities in 2011! During the AGM that year, the chairman revealed they were facing challenges with rising rental and labour costs and were in the midst of improving their cost controls.
I viewed their challenges and the impairment loss as a temporary issue that should be smoothed out over time and backed by their growth numbers and valuation, I increased my stake in Japan Foods. This gave me an average stock purchase price of $0.305.
Two years on, Japan Foods’ management did fulfill their promise of controlling their costs. They recently announced a whopping 73% gain in profit in 2013 and gave out $0.025 in dividends (this gives me a dividend yield of 8.2%!). Its share price not surprisingly also jumped in tandem with its stellar growth. As of today, its share price is $0.78 netting me 155.73% returns in just under three years. Kick-ass!Earning Disclaimer
“Please note that the material here is provided to you for general information and illustrative purposes only, or as descriptive case studies on how our value-investing principles may be applied. It is not intended to be and should not be construed as any form of general or specific financial advice. For the avoidance of doubt, we do not recommend or provide opinions on how or what you should or should not be investing in, and you should always do your own research and independent assessment before making any investment decisions, taking into account your own specific circumstances. If you require any financial advice on investments or any other financial matters, please consult the relevant professional financial advisers.”