Food Empire Holdings - RHB Invest 2017-08-17: Still a Currency Play; More Upstream Projects Could Come

FOOD EMPIRE HOLDINGS LIMITED F03.SI

Food Empire Holdings - More Upstream Projects Could Come

Food Empire’s 2Q17 results announced on Saturday, 12 Aug were in line with our expectations. 1H17 PATMI of USD8.6m made up 50% of our full-year estimate. 2Q17 core earnings turned positive from losses in 2Q16, due to YoY strengthening of RUB and UAH against the USD.
However, we would like to highlight that US’ new sanctions against Russia have resulted in c.5% QoQ drop in RUB in 3Q17. KZT has also depreciated by c.6% against the USD. We think the effect of weaknesses in RUB and KZT could be partially offset by the appreciation in UAD against the USD. Overall, we believe this could mean a smaller gross margin expansion for Food Empire, which has been factored into our model.
Management told us that its core markets in the CIS countries grew in line with its expectation, in local currency terms, in 2Q17. Moreover, its upstream projects, operating at utilisation rates of around 70-80%, also saw satisfactory sales contributions. As its plants are running at almost full utilisation rates, we think there may be potential expansion from the upstream projects, moving forward.
Maintain BUY, with a TP of SGD0.95 (44% upside) implying 18x FY17F P/E.

The Russian operations saw a 12% YoY improvement in sales on the back of a stronger RUB against the USD, but fell 11% QoQ as the RUB depreciated again in the second half of June. UAH should continue to improve as the currency continues to appreciate.
Kazakhstan and other Commonwealth of Independent States (CIS) markets saw weaker sales QoQ, due to a one-off reduction in price compensation to distributors in 1Q17;

Sales in Indochina picked up in 2Q17, but 1H17 remained 7% lower vs 1H16. Management attributed this to the difference in timing of the Lunar New Year in 1Q17, and stiffer competition.
Sales in the other markets were the key bright spot in the quarter’s results – 2Q17 sales grew 62% YoY and 17% QoQ to USD13.7m. This was mainly due to higher sales contribution from the group’s non-dairy creamer plant in Malaysia, and instant coffee plant in India.

Management confirmed our assumption of sales from the CIS markets were probably largely affected by currency fluctuations and said that its core markets are mature markets. As such, they have grown at a single-digit rate, as a whole, in local currency terms.
Management also believes that the USD/RUB rate has stabilised at about 60 RUB per USD – which falls within its budgeted range. Barring any major movement in the RUB, we believe that its gross margin may widen as we had forecasted.

Food Empire’s best-performing geographical segment for 2Q17 was under its “other markets” classification. Sales from this segment surged 62% YoY and 16% QoQ, which was mainly attributed to its non-dairy creamer (NDC) plant in Malaysia and instant coffee plant in India. We understand that these plants are operating at utilisation rates of 70-80%. Should sales volumes continue to grow, we think management may choose to expand these upstream projects.
Currently, the group’s snack plant in Malaysia is also operating at a 80% utilisation rate, and management plans to add an additional line to this facility. As such, we lift our capex projection by another USD4m to reflect this.

As Food Empire’s 1H17 results are in line with our expectation, we maintain our earnings estimates and TP.
However, we would caution investors to look out for key risks that include any major fluctuations in the RUB, Ukranian Hryvnia (UAH) or Kazakhstani Tenge (KZT).
Investors should also be alert on potential impairments from Food Empire’s associate, Caffé Bene, if it continues to underperform.

Juliana Cai CFA RHB Invest | http://www.rhbinvest.com.sg/ 2017-08-17

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