Flying Garden Co: a cheap and well managed Japanese fast-food restaurant stock
For my investigation of Flying Garden Co (3317 on the exchange in Tokyo) I had a look into the annual report over the year ending on 31 March 2023 and the quarterly report ending on 31 December 2023. I also had a look at the latest annual results as published on the company website.
My notes might not be accurate since they do not take into account information published after 31 March 2024 and I depend on software translations of Japanese.
The company operates suburban roadside “Flying Garden” hamburger restaurants, “in Tochigi Prefecture, Gunma Prefecture, Ibaraki Prefecture, Saitama Prefecture, and other areas” in Japan. Its main product is the “Bomb Hamburger”. In total there are almost 5000 seats in almost 60 restaurants with over 5 million visitors per year.
The company is small with a market cap of about 24 million USD. It is also cheap based on profitability with EV/EBIT about 4. Multi-year metrics and a high Piotroski score suggest good earnings quality. Because of some cash hoarding P/E is not very low at just below 10.
Substantial shareholders (31 March 2023): “Nozawa 80 million” (fom Kiryu City) 28.81%, “Active Limited Company” 8.37%, the CEO Mr. Takushi Nozawa 4.58%, Nozawa Michiko 3.75%, Yoshifumi Nozawa 3.58%, FG Stockholding Association 2.90%, Tadao Suda (like several other large shareholders also from Kiryu City) 2.20%. There are two individuals that are probably not related to the Nozawa family holding about 1% of the shares each.
The CEO is the second son of the chairman/“Representative Director” (red flag). I am almost sure the chairman controls the 28.81% stake of “Nozawa 80 million”.
Four directors earned 101.7 million JPY in financial year 2023. They did not get any variable pay.
In the annual report over financial year 2023 it says “Not applicable” in the section for related party transactions.
The balance sheet is strong with low leverage, a conservative current ratio, lots of cash and no debts.
I see “buildings” on the balance sheet but no “land” and no “lease liabilities”. I do see “land rental” in the P&L accounts (161 million JPY in financial year 2023). So probably the company owns the buildings for the restaurants but not all the land. But on page 36 of the annual report it says the company owns 1.35 billion JPY of tangible fixed assets. The company concludes that section with the following: “However, since the Company holds a large amount of tangible fixed assets, particularly at stores, new impairment losses may occur in the future if store performance deteriorates or land prices fall significantly.”
The company is a reliable dividend payer. I could not find any significant repurchases or dilutions.
From the trends in net income and cash flow from operations my conclusion is that more and more Japanese people prefer cheap and fat burger meals above healthy traditional Japanese food.
My take: cheap local Japanese growing burger restaurant. Considering how expensive such growing businesses are in the Western world this stock is a real bargain. Cheap mainly based on EV/EBIT, P/FCF and EV/Revenue. Excellent quality metrics. I have not found any governance issues apart from some cash hoarding. I like the low volatility of the stock price. I think this is a good stock for a small position.
Disclosure: long shares of Flying Garden Co.