Food Empire Holdings - RHB Invest 2017-05-15: A Good Caffeine Fix

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FOOD EMPIRE HOLDINGS LIMITED F03.SI

Food Empire Holdings - A Good Caffeine Fix

• Post analyst briefing, we are even more upbeat about the prospect of Food Empire. Management sounded a lot more optimistic on the company’s outlook compared to a couple of quarters ago. We believe Food Empire would continue to deliver strong results should currencies remain stable. 
• Reiterate BUY with a higher TP of SGD0.95 (from SGD0.85) as we raised our forecast on better gross margins.

WHAT'S NEW

• Post briefing, we raised our gross margins assumption as management also seemed confident of achieving higher gross margins YoY. We think the macro signs are also rather positive for Food Empire’s gross margins: 
  1. Russian Ruble (RUB) continues to strengthen against the USD; 
  2. Robusta coffee prices took a plunge in April; 
  3. Food Empire is able to better control its labour and processing costs after expanding its own production lines in the last two years.

Lower Indochina sales – not a worry. 

• Although sales from Indochina fell 18% YoY, this was mainly due to a higher stock pile up by retailers in Dec 2016 as a result of the earlier Chinese New Year. Management cited that sales in Vietnam have normalised since Feb 2017. 
• Although the market sees more competition, we believe Food Empire is likely to introduce more variations of coffee products in the coming quarters to defend its market share.

Early signs on new markets remain positive. 

• Sales from both China and Myanmar did better compared to last year albeit from a lower base. We understand that Food Empire is trying to replicate its success experienced in Vietnam into Myanmar, by having more control of its distribution network. 
• In China, Food Empire is likely to introduce a wider product range to tap on the existing distribution network.

Reiterate BUY with a higher TP of SGD0.95. 

• We raised our forecast by 11-14% over FY16-19F on higher gross margins expectation. This lifted our TP to SGD0.95 (from SGD0.85), pegged to 18x P/E, implying a 42% upside. 
• With the currencies of its key markets in Russia, Kazakhstan and the CIS (Commonwealth of Independent States) stabilizing and a potential growth from Indochina and China markets, we expect Food Empire to deliver a strong performance in FY17F.

Juliana Cai CFA RHB Invest | http://www.rhbinvest.com.sg/ 2017-05-15

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.95 Up 0.850