Hiramatsu 2764
February 01, 2014 - 1:32pm EST by
kwee12
2014 2015
Price: 727.00 EPS $42.00 $25.00
Shares Out. (in M): 42 P/E 17.2x 16.0x
Market Cap (in $M): 270 P/FCF 16.1x 14.7x
Net Debt (in $M): 26 EBIT 28 31
TEV ($): 296 TEV/EBIT 10.6x 9.7x

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  • Japan
  • Restaurant Operators

Description

Summary
Hiramatsu operates high-end French and Italian restaurants primarily in the Tokyo metro area, and we believe that Hiramatsu is a best-in-class operator trading a discount to the peer group, with a sustainable competitive advantage and a track record of generating and returning cash to shareholders.  While not dirt cheap (then again, what is today?), we believe Hiramatsu should trade at a premium to peers, with a path to sustained growth in free cash flow and limited downside risk given its record of returning capital

Best-in-class operator: Hiramatsu's operating margins of ~25% (and ROIC of 30%, ROE of 40%, and an ROA of 17%) are far above peers who typically have OMs <10%.  This is driven by its position at the high-end of the market, manaical focus on cost and mix benefit of more profitable weddings business

Capital return: Hiramatsu has a 30% payout ratio / 2% yield; and has bought back 15% of shares over the past 2 years in a market (Japan) and sector (restaurants) where capital return is rather poor 
 
Valuation: The stock currently trades at 15x FYE 15 P/E and 8.4x EV/EBITDA which is a discount to peers (the Japan Topix Food index trades at ~17-18x).  In our view, this presents an attractive risk / reward opportunity.  We can see a path to ~20x earnings in addition to the return of capital to shareholders
 
This is a small company that lacks coverage (2 local boutiques cover the name -- Ichiyoshi Securities and Tokai Tokyo Research), with growth and margins that do not look like a typical restaurant company
 
Note: This is not a macro play on Japanese equities (although we will entertain that discussion in the comments); in short we are neutral to slightly bearish on Japanese equities, but believe Hiramatsu is a premium name that is both growing and more defensive than typical names in the market and sector -- despite being a high-end restaurant operator, in the downturn they posted 3% top-line growth and 168 bps increase in OPM
 
The business
Hiramatsu got its start back in 1982, opening up its first French restaurant (aptly named Hiramatsu), in the Nishi-Azabu region of Tokyo.  The portfolio now consists of 26 restaurants, including 4 Michelin-star restaurants in Tokyo and 1 Michelin-star restaurant in Paris.  Importantly, the types of clientele the restaurant caters to are the high end customers (average ASP is >$500 USD, or 30,000 yen).  Compared to many restaurants that have OPM of sub <10%, this is definitely a best of breed restaurant operator, especially in extremely competitive environment like Tokyo, which has the most Michelin star rated restaurants out of any city in the world.  Currently, Hiramatsu operates primarily out Tokyo, which means some of the other major cities are underpenetrated/nonexistant (i.e. Kyoto, Osaka, Fukoaka, and Sapporo to name a few).  Although restaurant is in Paris; but we do not see international growth as being a big growth driver given the local growth opportunities available
 
Advantage I: Sustainable restaurant growth
New restaurant expansion is one of the riskiest investments known to man, with many experts cite a 70%+ chance of failure in the first three years.  However, before the company even begins to think about laying the groundwork for a new restaurant, the company targets a 30% ROIC for any given region (this works out to ~3 year payback period).  What makes Hiramatsu special is that they are able to establish their brand within a given region of the area and ensure that their restaurants don't cannibalize each other.  Their two flagship brands, Hiramatsu (French) and Aso (Italian), allow for multiple restaurants to be opened in a given region without cannibalizing each restaurant's sales, as they have proven in the Tokyo metro area.  The dual growth engine of new brands (they can continue to develop newer brands, like the Paul Bocuse brand, which also is a winner of a Michelin Star) along with existing brand growth growth, allows for a flexible yet powerful restaurant model
 
Currently, the company believes they can open up 1-2 restaurants a year, which sets the expectations rather low in terms of sales growth.  Any upside to both customer spend as well as any additional successful expansions of their restaurants would be a bonus for the stock
 
Advantage II: Cost excellence
Management is focused relentlessly on maximizing productivity among its workforce (another rarity among Japanese companies, which generally act more like social charities than shareholder oriented companies).  Hiring of staff is kept to a bare minimum, which is helped out by the fact that their restaurant reservation system is extremely efficient and easy to use.  This differs from many restaurants in Japan that still use phone/pen and paper to document reservations.  For reference, Gurunavi, Opentable, Kakaku, and Hotpepper have just started to enter the online reservation market, though remains extremely underpenetrated
 
Advantage III: The high-margin wedding business
Another phase to their restaurants is that they attract weddings to many of their flagship restaurants.  What makes this attractive is that the average customer spend (>$400 USD per head) is amplified by the fact that the number of people they service typically goes up (from ~60 people in a regular restaurant setting to >80 in a wedding setting).  The company currently has 50% of their revenue in wedding income (likely higher amount as a % of OP, given the higher margin profile).  Given Hiramatsu sets up a restaurant with a stated payback period of 2-3 years for regular dining, the wedding business provides additional upside and further derisks new restaurant growth
 
Advantage IV: Capital return
The company currently has a 30% payout ratio, though Hirmatsu-san has stated that they are contemplating potentially raising the payout ratio.  Normally for a Japanese company, a company considering "raising" a payout ratio generally is an empty promise, though given Hirmatsu's track record, there likely is more weight behind these words compared to the normal Japanese company.  Additionally, the company has bought back 22% of the stock over the past four years (15% in the last two) , reflecting their philosophy of rewarding shareholders
 
Risks
As with all consumer discretionary stocks, a slowdown in the Japanese economy will lead to a multiple deflation for the stock.  With their past record of share buybacks coupled with a dividend, we believe there is some floor to valuationn in case of a downturn.  Additionally, the company is somewhat sensitive to new restaurant openings, as a failed restaurant opening will depress their above-average margins.  Finally, a slowdown in the Japanese economy may also impact Hiramatsu, though the company has been very successful in being able to grow both margins and revenue during the 2008 financial crisis (FYE 2009 they posted a 3% Y/Y growth rate and a 168 bps increase in OPM)
 
As a complete sidenote, we believe this is the cheapest stock on an EV / Michelin Star basis
I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.

Catalyst

No immediate catalyst, other than being a best-in-class operator trading at a discount.  Additionally, Hiratsu has a strong growth trajectory and is actively returning cash to shareholders in a market typically does not
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