FOOD EMPIRE HOLDINGS (FEH SP) - UOB Kay Hian 2017-08-14: 2Q17 Results In-line

FOOD EMPIRE HOLDINGS LIMITED F03.SI

FOOD EMPIRE HOLDINGS (FEH SP) - 2Q17 Results In-line

Food Empire’s 2Q17 results came in within expectations as net profit to equity holders rose 93.7% on the back of strong growth in sales for most key markets.
As core market currencies stabilise with a possible recovery in oil prices, we expect Food Empire’s pricing power to translate into stable growth for the company. The company is exploring M&A to expand further.

Maintain BUY with a slightly lower PE-based target price of S$0.87 (previously S$0.90).

Food Empire Holdings (FEH) reported 2Q17 results with net profit to shareholders coming in at US$3.2m vs US$1.8m for 2Q16. The increase in net profit was attributable to an increase in sales across all geographies as 2Q17 sales rose 17.6% yoy to US$62.8m.
Russia accounted for about 42% of sales for 2Q17 with sales growing 12% yoy from US$23.8m in 1Q16 to US$26.6m in 1Q17 due to a stronger Russian Ruble (RUB). Vietnam sales came in flat with sales growing 4% yoy from US$9.1m in 2Q16 to US$9.5m in 2Q17 in the face of a difference in festive season timing and stiffer competition in Vietnam.
Sales in the other markets continued on a strong growth trajectory as sales grew 61.6% to US$13.7m in 2Q17 due to higher sales contribution from the non-dairy creamer plant in Malaysia and the instant coffee plant in India.

Gross margin trended upward from 34.9% in 2Q16 to 37% in 2Q17 due to higher operating leverage together with a more favourable foreign exchange rate.

FEH intends to focus on expanding into new geographies outside of its core markets (Russia, Ukraine, Kazakhstan and CIS countries) to provide a more balanced portfolio which is evident from the 2Q17 results as sales from Indochina and other markets grew from 32.9% of total sales in 2Q16 to 36.9% of total sales in 2Q17.
Replicating the success of its expansion into Vietnam, the group intends to replicate the proven business model into other regions in Asia.

FEH’s CEO, Mr Sudeep Nair’s, last open market repurchase of FEH shares was in May 17 at S$0.65 which is at a 3% discount to current share price levels.

Geopolitical tensions between Russia and the US have been high this year with Vladimir Putin announcing his decision to expel US diplomats in July. However, with the US more focused now on the situation with North Korea and in need of regional friendships from China and Russia, these tensions could be mitigated for now.

We have lowered our 2017-19 net profit estimates slightly by 15-3.9% as we tweak our tax rate assumptions upward and fine-tune our selling and distribution expense and general and administrative expense assumptions.

We maintain our BUY recommendation on FEH with a lower PE-based target price of S$0.87 (previously 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/ 2017-08-14

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.87 Down 0.900