Food Empire - RHB Invest 2019-11-21: Instilling Stronger Discipline; Maintain BUY


Food Empire - Instilling Stronger Discipline; Maintain BUY

  • Maintain BUY with higher Target Price of SGD0.83 from SGD0.73, 36% upside, c.2% yield, pegged to 12x FY20F P/E.
  • The write-off of its Caffe Bene associate in FY17, as well as the losses from new markets in recent years, have sparked investors’ concerns. During FOOD EMPIRE HOLDINGS (SGX:F03)'s analyst briefing, management said it would increase discipline in capital deployment and has drawn up several initiatives to address these concerns. This signals that management is receptive to investors’ feedback from previous meetings, and we are positive on this new development.

Formalised dividend policy.

  • One of the initiatives would be to formalise a dividend policy next year. A formal policy would ensure a certain amount of cash flow is set aside for shareholders each year. See Food Empire Dividend History.
  • We note that Food Empire had a payout ratio of 15-17% in the past three years, with no dividends in FY14-15 when the group was hit by major RUB devaluation. As such, we believe the group is likely to have a conservative dividend policy of c.15-20% payout ratio, with potential for special dividends when there is unutilised cash.

Less drag from underperforming markets.

  • This year, Food Empire has streamlined some of its unprofitable markets. Besides exiting Myanmar, we note that the group announced the liquidation of several small wholly-owned subsidiaries throughout FY19. This improved 9M19 net margin by 1.4ppts to 9.8% (9M18: 8.4%). See Food Empire Announcements.
  • As Food Empire completes its streamlining exercise in 1Q20, we believe it would also have a cleaner balance sheet – and thus less drag from the underperforming assets in FY20F.

Delivering more sustainable growth.

  • Barring any major depreciation of the group’s key currencies, we expect earnings growth to remain resilient next year, as management focuses on its key markets – Russia, the Ukraine, Kazakhstan, CIS countries and Vietnam. Management also has plans to grow its presence in the Philippines market, but guided that the investments would take place at a calculated pace, thereby limiting margin erosion on profits.

Forecast changes.

  • We raise FY19F-21F earnings by 12-14% mainly due to cost savings from the streamlining exercise.
  • We believe the cost savings would offset the new investment costs for the Philippines market. In addition, we had initially expected start-up expenses of the second India plant to kick in next quarter. However, management clarified that the second India coffee plant would only start commercial operations some time in 2Q20-3Q20, thus delaying the depreciation expense.
  • CEO Mr Sudeep Nair has been buying shares from the secondary market at prices between SGD0.56 and SGD0.61. This gives us added confidence as to Food Empire's near-term performance. See Food Empire Share Price; Food Empire Target Price.
  • Maintain BUY.

Juliana Cai CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-11-21
SGX Stock Analyst Report BUY MAINTAIN BUY 0.83 UP 0.730