Restaurant chain operator constantly ekes out operating efficiencies even amid the pandemic
Tokyo-listed Ohsho Food Service Corp (Ohsho) is a Kansai-based operator of directly-run restaurants in the Kansai, Chubu, and Kanto regions of Japan.
Ohsho also sells food material wholesale to franchise stores. The company mainly sells noodles and gyoza dumplings, and has over 730 outlets in Japan. It is currently developing three stores in Taiwan. Our case for the company is its comprehensive business model, from acquiring ingredients to pricing and food delivery services, coupled with strong fundamentals. The company’s strategy of bulk-purchasing ingredients and intensive primary processing enables good quality control and lowers production costs. Open kitchens in its outlets enable customers to witness food preparation and cooking, while the food menu has local and regional specialities that meet the preferences of all patrons, and prices are on average 10-30% lower than its competitors. A takeout service is available for all menu items, along with a delivery service in response to the pandemic and customer needs.
All these features enable Ohsho to have a competitive edge, reflected by strong profits and steady growth, despite the relatively stagnant business environment of the food and restaurant sector as a whole.
For Ohsho’s latest 2QFY2022 ended September 2021, the company performed strongly, with a 3.4%, 33.5% and 121.3% increase in its net sales, operating profit and net income respectively, compared to the same quarter in the previous year. The sales increase was mainly due to record sales of takeout and delivery services for directly operated stores and record in-store sales despite shortened operating hours. The increase in operating profits was mostly due to an increase in net sales as well as the efforts to keep personnel expenses under control by reorganising work shifts in a more efficient way and to cut down utilities’ expenses. Net profits were boosted by subsidy income for reduced operating hours and other factors.
The pandemic affected Ohsho’s operations as restaurants were mandated to shorten operating hours and suspend sales of items such as alcohol, which caused a substantial drop in restaurant footfall. Ohsho was able to mitigate the negative impact of these changes by developing and tapping the strong demand for takeout and delivery services during the pandemic. Production efficiency was also increased within shorter operating hours, and sales promotions were conducted in a timely manner, which helped boost its revenue and profit for the year.
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On the store network front, Ohsho opened four directly operated stores and three franchised stores, and closed one directly operated store and five franchised stores. The result was a total network of 531 directly operated stores and 204 franchised stores at the end of 2QFY2022.
Apart from expanding its takeout and delivery services, the company has also adopted initiatives such as online cooking training for employees and provided a variety of curricula covering cleaning to cooking takeout orders. Online customer service training programmes were also improved, and new items were added to the delivery menu. The number of stores that provide delivery services were increased for both directly operated stores and franchised stores.
The restaurant has been finding ways to broaden the appeal of its food and beverages to reach out to both drinkers and non-drinkers. Cashless payment methods were also improved through the introduction of QR payment codes in the company’s stores.
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Another of Ohsho’s strategies involves restaurant opening, where it opened stores in a new format, which specialises in takeout and delivery services as opposed to dine-in.
Chart 1 illustrates the company’s and operating margins, which reflects its competitive advantage in the relatively saturated restaurant business. In terms of financial safety, the company has a current ratio of 2.1 times, and is net cash, which implies that the company has its liquidity and solvency risk well managed. The company also has a good record of positive net income, operating cash flow and free cash flow over the past five years.
Ohsho has relatively attractive yields, as its earnings yield, operating cash flow yield, free cash flow yields and dividend yields are 6.3%, 5.3%, 7.3% and 1.7% respectively, compared to the risk-free rate of 0.2%. Ohsho trades at a discount compared to domestic peers for its forward P/E and price to book, at a 26% and 39% discount respectively.
Sentiment-wise, there are three “buy” calls, and no “hold” and “sell” calls on the company from analysts. The average target price for the company is around 25% above its trading price of JPY5,850 as of Jan 28. Our in-house valuations indicate that the company is worth at least 15% above its current trading price. Ohsho is a stock for investors seeking stable growth with a relatively lower risk profile.
