Food Empire Holdings - RHB Invest 2018-03-01: A Good Time To Drink Coffee

FOOD EMPIRE HOLDINGS LIMITED F03.SI

Food Empire Holdings - A Good Time To Drink Coffee

Excluding a one-off impairment charge for Caffé Bene, Food Empire registered an outstanding recurring PATMI of USD20.7m for FY17 ie 6% above our expectation. Revenue from all markets came in ahead of our estimates.
With the upstream projects coming into maturity, we expect to see improved profitability coming through in FY18. The recovery of oil prices and the World Cup to be hosted in Russia this year could pose further upside for Food Empire through the strengthening of the RUB.

Maintain BUY with higher Target Price of SGD1.07 (from SGD1.00, 60% upside).

Revenue from all geographies exceeded our forecast in 2017. In particular, Kazakhstan and the Commonwealth of Independent States (CIS), as well as the Other markets were strong drivers, growing c.30% y-o-y. Sales in Kazakhstan benefitted from higher sales volume from the change in business model and reduction of price compensation to distributor.
On the other hand, Other markets received higher sales contribution from the upstream projects ie business-to-business (B2B) sales of non-dairy creamer, snacks and instant coffee.

With improving currencies in Russia, Kazakhstan and other CIS countries, we expect higher domestic consumption in these markets, thereby driving higher volume sales in 2018. The recovery of oil prices and the hosting of the FIFA World Cup in Russia could further boost the appreciation of the RUB.
We believe this could mean potential upside to our earnings estimate, as we have not factored in changes in the USD/RUB rate in our model.

Outside of the core markets, upstream projects have been the key driver of growth in 2017. We believe the upstream projects could deliver higher margins in 2018, as they are now in the maturity phase and require lower advertising and promotional cost.
We note that the Vietnam market has plateaued and came off slightly. The group is now focused on the Myanmar and China markets, and we expect these markets to chart stronger contributions across FY18F-19F.

4Q17 losses from Caffé Bene escalated to USD3.8m (9M17: USD1.7m) as it took impairment from the closing of its Times Square outlet.
We note that Caffé Bene filed for a court-led rehabilitation in Jan 2018 and Food Empire took in a one-off USD7.7m impairment charge on its investment and loans to Caffé Bene, as expected.

We are positive on the FY18 outlook, and raise our FY18F-19F earnings by 7% and 9% respectively on the back of stronger-than-expected margins and sales volumes. This raises our Target Price to SGD1.07, pegged to 18x FY18F P/E.

Juliana Cai CFA RHB Invest | http://www.rhbinvest.com.sg/ 2018-03-01

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 1.07 Up 1.000