Pan Pacific’s US subsidiary to buy sushi chain The Mikuni Restaurant

Pan Pacific’s US subsidiary, Vanshow California, has recently announced its decision to acquire The Mikuni Restaurant Group, a sushi chain in Sacramento, California. As per the deal, Vanshow will acquire Mikuni’s eight locations in the Sacramento region and one in Concord. The deal, which is expected to close in the second quarter of 2025, is expected to create synergy between both entities.

Pan Pacific International Holdings Corporation, established in 1980 and headquartered in Tokyo, Japan, is predominantly engaged in the retail business. The company carry out the sale of household appliances, daily commodities, food, fashion supplies, sports and leisure goods, as well as do-it-yourself (DIY) products. Additionally, the group operates big convenience and discount stores under the names Don Quijote, MEGA Don Quijote, MEGA Don Quijote UNY, Picasso and Apita/Piago. The total store network stood at 748 stores as of 1HFY25 end, with Japan comprising 636 stores and Overseas 112 stores.

Segment-wise, the Domestic DS business contributed to 62% of the sales mix in 1HFY25, followed by Domestic UNY at 19.3%, Overseas at 15.3%, and Other at 3.4%.

Upward revision of bottom-line forecasts

The net sales forecast for FY25 remains the same at JPY2,220bn. However, the company has revised upward the full-year forecast for operating income by JPY5bn to JPY155bn and net profit by JPY3.5bn to JPY90bn. The upward revision reflects the strong performance of the DS store business, offset by a downward revision in the North America business owing to factors impacting 3Q onwards, such as wildfires in Southern California, a system glitch in Hawaii, and struggles in Guam.

Continued capex investments in the long-term

Pan Pacific delivered a revenue CAGR of 9.5% over the period FY19-24 to reach sales of JPY2,095bn. The operating income performance outpaced revenue growth during the same period, clocking a CAGR of 17.3% to JPY140bn, aided by a margin expansion of 194 bps to 6.7%. Consequently, the net income surged at a CAGR of 13% to JPY88.7bn.

The cash position remained flat at JPY173bn during the same time, which could be attributed to an increase in capex activities and repayment of borrowings. As a result, total debt to capital improved to 47.8% in FY24 end from 60.9% in FY19 end.

On the other hand, the company’s peer, Seven & i Holdings, fared marginally better, with a revenue CAGR of 11% over the past five years, reaching JPY11,472bn in FY24. However, operating income grew at a comparatively slower pace of CAGR at 5.4% to JPY534bn during the same period. Net income CAGR further slowed down to 2% during the past five years, reaching JPY225bn in FY24, impacted by asset write-downs.

Record performance in 1HFY25

Pan Pacific achieved record-high sales and operating income during the 1HFY25 period. Net sales grew by 7.7% YoY to JPY1,128.6bn, which was aided by demand for seasonal products and events during the year-end sales season. As a result, same-store sales grew by 7.1% YoY in the Discount Store business, which propelled the segment sales revenue to JPY724.9bn. In addition, the rise in inbound tourism and the profitability of PB/OEM products significantly boosted overall retail performance during the period. Operating income surged by 18.9% to JPY89.7bn, supported by an expansion in margins by 80 bps to 8%. Consequently, the bottom line rose by 12% to JPY54bn.

Decent recent stock performance

Over the past 12 months, the company's stock has delivered decent returns of approximately 15%, reflecting a positive fundamental trajectory. In comparison, its local peer, Seven & i Holdings, delivered lower returns of 2.1%.

Despite the sharp run-up in the share prices, the company is trading lower compared to its local peer, Seven & i Holdings. Pan Pacific is currently trading at a P/E ratio of 25.6x, based on the FY25 estimated EPS of JPY157.5, which is lower than its local peer Seven & i Holdings at 31.1x. However, it is trading higher than its 10-year historical average of 25.2x.

In contrast, on an EV/EBITDA basis, the company is currently trading at 13x, based on the FY25 estimated EBITDA of JPY203.9bn, which is lower than its 10-year historical average of 14.9x. However, it is trading higher than its local peer Seven & i Holdings, at 7.2x.

Pan Pacific enjoys a favourable view amongst 16 analysts, with 11 recommending a ‘Buy’ rating and four giving an ‘Hold’ rating for an average target price of JPY4,455.6, implying an upside potential of 10.4%. The analysts’ views are further supported by an anticipated EBITDA CAGR of 8.1% over the period FY24-FY27, reaching JPY235.7bn, with margins of 9.6% in FY27. Additionally, analysts estimate a net profit CAGR of 11.5%, reaching JPY123.1bn with margins of 5% in FY27, and EPS to increase to JPY204.1 in FY27 from JPY148.6 in FY24. Similarly, analysts estimate an EBITDA CAGR of 1.3% and a net profit CAGR of 8.8% for Seven & i Holdings.

Overall, the company appears to be poised for growth, aided by the strong business momentum of the DS store business, decent traction in same-store sales growth, greater influx of visiting tourists and improvement in leverage. However, Pan Pacific is prone to a few risks, including adverse business conditions faced in North America, high capex investments, and changing consumer preferences. Additionally, the company’s operations make it prone to inventory obsolescence risks. Notwithstanding the given risks, the company is expected to be supported by positive sector tailwinds, including increased consumption and favourable macro factors.