Food Empire Holdings - RHB Invest 2017-12-19: Wake Up And Smell The Coffee

FOOD EMPIRE HOLDINGS LIMITED F03.SI

Food Empire Holdings - Wake Up And Smell The Coffee

Food Empire is our Top Pick for the consumer sector. We believe its core markets in the CIS region have stabilised.
In fact, higher oil prices and economic activities in Russia could bring about an appreciation in RUB next year which could help to drive higher gross margins. Margin expansion would also arise from the increased profitability of upstream projects while new markets such as Myanmar and China would continue to fuel volume growth.

Currently, the valuation is still undemanding at 12x FY18F P/E. We reiterate BUY with TP of SGD1.00 (56% upside).

Russia, which contributes over 40% of Food Empire’s revenue, is the host country for the World Cup next year. Although instant coffee is a matured sector in Russia, we believe the uplift in economic activity aided by the World Cup would help to raise overall domestic consumption.
Moreover, there is a currency mismatch between Food Empire’s revenue (RUB) and raw material cost (USD). Hence, any potential appreciation of RUB would be a positive driver for its gross margin.

The upstream projects which Food Empire embarked three years ago have come to fruition. Utilisation rate of its snack, non-dairy creamer (NDC) and instant coffee plants have reached around 80%. The group is now tweaking the sales mix of its food ingredients segment to focus on higher-margin products. This, together with a new snack plant would help to boost earnings growth in 2018.
We believe the group has further plans to grow the food ingredient business in the near-term which may be in the form of purchasing factories or new lands to build plants.

Since the Crimea crisis, the board has given the group a mandate to diversify out of its core markets in the CIS region. To date, revenue contribution from Russia and Ukraine has fallen to around 50% from > 70% pre-crisis.
Food Empire has been focussed on penetrating selected Asian countries. Today, it has made headways in the Vietnam market and would continue its efforts to grow the Myanmar and China markets. We expect to see more significant contributions from the new markets over the next 24 months.

Currently, the stock is trading at 12x FY18F P/E. We think the stock is rather undervalued given the stabilising CIS markets and the solid growth initiatives from its upstream projects and Asian markets.
Moreover, considering stronger oil prices and the World Cup being held in Russia next year, there could be further upside arising from the RUB appreciation, which we have not factored into our model.
We reiterate our BUY call on the stock with TP of SGD1.00, pegged to 18x FY18F P/E in line with peers’ average.
Key downside risk would include impairments on its under-performing associate – Caffé Bene.

Juliana Cai CFA RHB Invest | http://www.rhbinvest.com.sg/ 2017-12-19

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 1.000 Same 1.000