Japan Foods Holding Ltd (Time to buy?)

I noticed that there is insider purchasing of Japan Foods Holding Ltd shares by Non-Executive Director, Eugene Wong Hin Sun on 8 June 2015. Consequently, his deemed interest (as a percentage of total no. of ordinary voting shares/units) has increased from 4.12% to 4.8%. Click here.

This has piqued my interest, since Japan Foods share price has recently dropped. See below. The drop in share price in early Nov 2014 can be attributed to the plunge in net profit by 52% to S$1.8 million which is mainly due to increase in selling and distribution expenses & higher rental and utilities cost on the back of newly opened stores (as per financial results released on 5 Nov 2014, for the six months ended 30 September 2014). Read here.

Moreover, fundamentally, Japan Food Holdings has strong cash to debt ratio, and has been able to grow its revenue base at a good pace. Read here and here.

Current ratio of Japan Foods is 2.8.

Note: Current ratio expresses the extent to which the current liabilities of a business (i.e. liabilities due to be settled within 12 months) are covered by its current assets (i.e. assets expected to be realized within 12 months). A current ratio of 2 would mean that current assets are sufficient to cover for twice the amount of a company’s short term liabilities.

Revenue and net income has been increasing over the years.

Let’s do a quick study on the current share price of SGD$0.48 – via Trailing PEG and Intrinsic Value.

1) Trailing PEG

• P/E: 11.39 (from POEMS)
• Dividend Yield (%): 4.17 (from POEMS)
• 5 years EPS compound growth rate: 16.24 (from ft.com – see below)

The trailing PEG will be 11.39/(16.24+4.17) = 0.56. Which is good (way below 1).

2) Intrinsic Value

If we calculate the intrinsic value using a growth rate of 16.24%.

F = P(1+R)^N

• F = the future EPS
• P = the starting (present) EPS (SGD 0.03)
• R = compound growth rate, 14.616 (90% of 5 yrs historical growth rate,16.24)
• N = number of years in the future (5)

Estimated future EPS: 0.0593

I will be estimating the future PE of Japan Foods Holding Ltd to be 11.7. (See below, data from Morningstar) Average of PEs from 2009 to 2014.

Future Stock Price

P=EPSxPE

• P = future stock price
• EPS = future EPS
• PE = future PE

Hence future stock price of Japan Foods is 0.0593 x 11.7= SGD 0.69381

Intrinsic Value

P=F/(1+R)N

• P = present (intrinsic) value
• F = future stock price (0.69381)
• R = MARR (15% or 0.15)
• N = Number of years (5)

Hence intrinsic value of Japan Foods is SGD 0.34.

Given the current stock price of Japan Foods at SGD 0.48, there is no margin of safety base on the estimated intrinsic value.

In fact, current share price is higher than intrinsic value by 45%.

Moreover current Price to Book value (most recent filing) is 2.89. (which could be lower)

In summary:

Fundamentally Japan Foods Holding Ltd is a strong company.

Although the trailing PEG suggests that current price is a buy (way below 1, which is good), but the study on intrinsic value reveals otherwise. Moreover, as explained by Executive Chairman and Chief Executive Officer of Japan Foods, Mr Takahashi Kenichi: the operating environment has become increasingly challenging due to stronger competition and higher business costs. (read here)

I shall observe this company more closely, and if its narrative / outlook and financial fundamentals improve (it has done so in the past), it would be worth dipping into the shares of this company.