Food Empire - RHB Invest 2019-08-13: Better Margins Post Rationalisation; Still BUY

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FOOD EMPIRE HOLDINGS LIMITED (SGX:F03)

Food Empire - Better Margins Post Rationalisation; Still BUY

• Stay BUY with a higher SGD0.73 Target Price from SGD0.69, 38% upside, 1.6% yield.
• Food Empire Holdings Limited (SGX:F03)’s 2Q19 results beat our expectations. PATMI surged 140% to USD5.6m. Excluding FX impact, core PATMI grew 22% to USD5.2m.
• The tremendous improvement in results was largely attributed to the rationalisation of under-performing markets.
• We expect 2H19 to also show strong improvements following the rationalisation. As such, we raised our FY19F-21F earnings 6-8%, thereby increasing our target price.

Food Empire's 2Q19 results were above our expectations.

• This was largely attributed to the rationalisation of advertising & promotions (A&P) costs in under-performing new markets such as Myanmar and the Philippines. As a result, operating margins improved 2.1ppts y-o-y to 9.3%, leading to strong growth in earnings.

2Q19 revenue fell 2% y-o-y to USD68m.

• Sales from Indochina fell 12% y-o-y, largely due to lower A&P expenditure in Myanmar. Food Empire’s biggest market, Russia, saw increased sales in local currency terms, but showed a 6.4% y-o-y decline in revenue when translated into USD.
• Overall, sales were pulled up by Ukraine, Kazakhstan, and other Commonwealth of Independent States markets, which delivered strong revenue growth of 15% y-o-y during the quarter.

Positive outlook for near-term earnings.

• Moving forward, Food Empire plans to focus its efforts on growing its core markets, given the slowing economy driven by US-China trade tensions. We expect to see a similar reduction in A&P expenditure over 2H19. However, the A&P savings are likely to be partially offset by higher depreciation from 4Q19. This is because the group’s second instant coffee plant in India is expected to complete construction this year and commence operations in FY20.
• Barring any major depreciation of the RUB, we expect FY19 earnings to deliver strong growth of 22% this year. We have raised our FY19-21 earnings estimates 6-8%, which – in turn – increased our Target Price to SGD0.73, pegged to 13x FY19F P/E.
• We maintain our BUY call on this counter.

Juliana Cai CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-08-13

SGX Stock Analyst Report BUY MAINTAIN BUY 0.73 UP 0.690