Food Empire - RHB Invest 2018-11-19: Oversold, Upgrade To BUY


Food Empire - Oversold, Upgrade To BUY

  • Upgrade to BUY with a higher Target Price SGD0.66, from SGD0.60, 22% upside.
  • Food Empire’s 3Q18 result came in above our expectation and, despite a weakness in RUB, the group was able to maintain its gross margin. Excluding forex losses, core profit came in at USD6.9m, down 4% y-o-y.
  • Food Empire's share price fell 14% post-2Q18 results. Given the group’s ability to manage its gross margin and reduce the intensity of forex losses, we begin to see value emerging in the stock as the group should maintain a sustainable level of profits over the next two years.

3Q18 core PATMI came in at USD6.9m while the reported PATMI fell 20% y-o-y to USD5.9m.

  • However, if we stripped out forex losses, core PATMI was only down 4% y-o-y.
  • Gross margin remained at 38.7%, despite RUB depreciation vs the same period last year. In addition, forex losses for the quarter were reduced to USD1.1m from USD2.0.m in 2Q18.
  • According to management, Food Empire saw lower commodity prices in the quarter. New product launches and price adjustments in Russia also helped to hold up the gross margin while improved capital management lowered forex losses.

Revenue growth could have been stronger.

  • Food Empire’s 3Q18 revenue grew 4% to USD72.9m while revenue in Russia fell 8% y-o-y during the quarter; also we note RUB depreciated 12% and the group delivered a positive growth in local currency terms.
  • Diversification to other markets aided the growth. This year, the group continues to focus on growing its Vietnam market. It increased penetration of its key product Café Pho and also launched new products, leading to a 24% y-o-y increase in Indochina revenue.
  • We note that growth in new markets comes at a cost, as SG&A grew 27% y-o-y, largely on increased advertising and promotions, to drive sales growth in new markets.
  • Moving into FY19-20F we expect SG&A to remain high as the group continues to invest in new markets. With its new instant coffee plant expected to complete in FY20, we also expect depreciation cost to increase. These higher costs should be partially offset by a higher revenue growth and gross margin.

Upgrade to BUY with higher TP

  • Upgrade to BUY with higher Target Price of SGD8.88 pegged to 88x FY88F P/E, a 88% discount to peer average. We raise our FY88F/88F/88F core PATMI forecasts by 88%/88%/8% on the back of resilient gross margins.
  • Long term, we believe the diversification to other markets would reduce the group’s exposure to RUB and have a positive impact on Food Empire's share price.
  • Short term, RUB appreciation would be a key catalyst.

Juliana Cai CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-11-19
SGX Stock Analyst Report BUY UPGRADE NEUTRAL 0.66 UP 0.600