Performance: +12.0%
Tokyo-listed Ohsho Food Service Corp was one our portfolio’s top performers for the four-month period, with a 12% gain. The company is an operator of Chinese restaurants that operates directly-run restaurants and wholesale food material to franchise stores. Ohsho mainly sells noodle and gyoza dumplings and has over 730 outlets in Japan and a handful of stores overseas, like in Taiwan.
The thesis for investing in the company is that its business model is comprehensive and differentiated throughout every stage of its products and service offering process. This enables Ohsho to have a competitive edge, despite the relatively stagnant business environment of the food services sector domestically.
The most recent financial results listed several challenges to the Japanese economy, which had slowed personal consumption due to the pandemic and rising corporate goods prices. Further, the Russian-Ukraine war also had caused disruptions to global supply chains, which led to higher food and energy prices and is expected to persist.
Domestically for the restaurant industry, the pandemic also caused several regulations to be introduced. For example, businesses were forced to shorten operating hours and limit the sale of alcohol. The higher raw material prices along with weaker sales was slightly offset by subsidy income for reduced operating hours, which dented the restaurant’s profits.
Despite this, Ohsho was able to perform strongly for the most recent financial period and year, with improvements in net sales, operating profit and net profit from the previous comparable period. This was mainly due to the company’s efforts and focus on providing and improving the level of quality, service and cleanliness to customers. This led to a steady recovery for in-store sales, supported strongly by take out and delivery services.
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Ohsho adapted well to the pandemic by introducing strategies that involved opening stores in a new format, which specialises in take out and delivery services as opposed to dine-in. Cash flow is expected to be strong with Ohsho’s focused and differentiated business strategies, as consumption and economies recover to pre-pandemic levels and state.
At current prices, the company’s yields are attractive compared to the risk-free rate of 0.3%. Ohsho’s earnings yield, operating cash flow yield and free cash flow yield are 7.0%, 12.1% and 8.8% respectively. Ohsho also pays dividends, and with the dividend yield currently at 1.8%, it is still more attractive than the risk-free rate.
Compared to domestic peers, the company trades at a 23% and 31% discount for its forward P/E and P/B respectively, denoting that it is very cheap at current prices. The company’s balance sheet is excellent, with a current ratio of 1.6 times, a net cash position and an interest coverage ratio of over 112 times.
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Sentiments-wise, there are four “buy” calls, no “hold” or “sell” calls on the company from analysts. The average target price for the company is around 10% above its current trading price of JPY6,590 ($67). Based on our revised in-house valuations, we think the Ohsho’s fair valuation is at least 15% above its current trading price. To recap, Ohsho is a stock to buy for investors seeking stable growth with a relatively lower risk profile.
Disclaimer: This is a virtual portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy or sell stocks, including the stocks mentioned herein. This portfolio does not take into account the investor’s financial situation, investment objectives, investment horizon, risk profile, risk tolerance and preferences. Any personal investments should be done at the investor’s own discretion and/or after consulting licensed investment professionals, at their own risk.
