Food Empire Holdings (FEH SP) - UOB Kay Hian 2017-05-16: 2QFY17 Stable Core Market Currencies Lead To Strong Results

Food Empire Holdings (FEH SP) - UOB Kay Hian 2017-05-16: 2QFY17: Stable Core Market Currencies Lead To Strong Results FOOD EMPIRE HOLDINGS LIMITED F03.SI

Food Empire Holdings (FEH SP) - 2QFY17: Stable Core Market Currencies Lead To Strong Results

  • Food Empire’s 1Q17 results came in above our expectations as net profit to equity holders rose 58.8% on the back of strong growth in sales for most key markets. 
  • As core market currencies stabilise, we expect Food Empire’s strong pricing power to translate into stable growth for the company. 
  • With the CEO buying back shares once again, investors should follow suit. 
  • Maintain BUY with a higher PE-based target price of S$0.90 (previously S$0.78).



WHAT’S NEW

  • Food Empire Holdings (FEH) reported 1Q17 results with net profit to shareholders coming in at US$6.3m vs US$4.0m for 1Q16. 
  • The increase in net profit was attributable to an increase in sales in Russia, Kazakhstan and the rest of the CIS nations. 
    • Russia accounted for about 48% of sales for 1Q17 with sales growing 23% yoy from US$24.3m in 1Q16 to US$29.9m in 1Q17 due to a stronger Russian ruble (RUB). 
    • 1Q17 Sales in Kazakhstan and the rest of the CIS nations grew 141.6% yoy due to a change in business model where FEH takes more control over sales by reducing the compensation given to distributors. 
    • Vietnam sales came in much weaker than we had expected with sales falling 18% yoy from US$8.6m in 1Q16 to US$7.0m in 1Q17 due to an overstocking situation in Vietnam in Jan 17. We believe that the situation has normalised in Feb/Mar 17. 
  • Stripping out the effects of forex and other one-off items, FEH’s 1Q17 profit to equity holders was about US$4.8m vs US$1m for 1Q16.

Margins on the rise. 

  • Gross margin trended upwards from 32.1% in 1Q16 to 39.9% in 1Q17 due to higher operating leverage together with a more favourable foreign exchange rate.


FINANCIAL HIGHLIGHTS


Looking to expand further. 

  • FEH is on the lookout for opportunities to expand into new geographies outside of its core markets. By replicating its proven business model in Indochina, FEH plans to expand into other regions in Asia. 
  • The group is also on the look out for M&A opportunities to expand further upstream or downstream.

CEO buying back shares once again. 

  • Since Nov 16, FEH’s CEO, Sudeep Nair has been buying aggressively buying FEH shares. On the 12th and 15th of May 2017, Mr Nair purchased a total of 3,613,800 shares of FEH at an average price of about S$0.65. 
  • With the CEO buying FEH shares so confidently, we believe investors should follow suit.



STOCK IMPACT

  • We have raised our 2017-19 net profit estimates by 16-17.4% as we tweak our gross margins assumptions upward to account for a more favourable exchange rate and higher operating leverage.


RECOMMENDATION

  • We maintain our BUY recommendation on FEH with a higher PE-based target price of S$0.90 which is pegged to peers’ 2017F average PE of 19x.




Nicholas Leow UOB Kay Hian | Edison Chen UOB Kay Hian | http://research.uobkayhian.com/ 2017-05-16
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.90 Up 0.780



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