Food Empire - RHB Invest 2019-11-12: Caffeine Rush; Keep BUY

FOOD EMPIRE HOLDINGS LIMITED (SGX:F03)

Food Empire - Caffeine Rush; Keep BUY

Maintain BUY and SGD0.73 Target Price, implying 35% upside and c.2% yield.
FOOD EMPIRE (SGX:F03) recorded another strong quarter in 3Q19 with PATMI growing 34% y-o-y to USD7.9m. Excluding FX impact, 9M19 core PATMI of USD21.2m met 96% of our full-year estimate, exceeding our expectations.

Revenue growth in the quarter was largely driven by higher sales volumes in the Ukraine and Indochina markets. Both markets saw double-digit sales growth during the quarter while the group’s largest market, Russia, saw revenue grew at a mature rate of 2% y-o-y. However, this was partially negated by a 7% decline in its other markets’ sales due to the rationalisation of businesses in underperforming markets. See Food Empire Announcements.
Excluding FX, 3Q19 core PATMI grew 28% y-o-y to USD8.8m on higher sales and margins. The group achieved a higher gross margin of 39.8% in 3Q19 (3Q18: 38.7%, 2Q19: 37.8%). The rationalisation of underperforming markets further raised its EBIT margin to 11.9% in 3Q19, marking a 3ppt y-o-y increase. The improvement came from a 7% decline in general and administrative expenses on top of the higher gross margin.

Food Empire’s second instant coffee plant in India is expected to be completed this year, and commercial operations are scheduled to kick off in FY20.
While we expect to see continued savings from the streamlining of businesses in 4Q19, this would be partially offset by pre-commissioning costs and depreciation expenses as the new instant coffee plant comes on stream.

Barring any major depreciation of the RUB, we expect FY20F earnings to remain resilient, as management focuses on key markets and rationalises weaker businesses. The cost savings should help to offset additional costs from the commencement of its new coffee plant.
We will review our earnings and forecasts pending Food Empire’s analyst briefing on Wednesday. See Food Empire Share Price; Food Empire Target Price.

Juliana Cai CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-11-12

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