Food Empire - RHB Invest 2020-02-26: Resilient Against COVID-19; Maintain BUY


Food Empire - Resilient Against COVID-19; Maintain BUY

  • Maintain BUY, Target Price rises to SGD0.88 from SGD0.83, 19% upside with 3% yield.
  • Food Empire (SGX:F03)’s 4Q19 results are in line with our estimate. 4Q19 PATMI of USD5.0m brought FY19 PATMI to USD26.1m. Excluding FX gains, FY19 core PATMI would be USD25.5m.
  • Amidst the COVID-19 outbreak, we note that Food Empire’s market exposure to China is small, neither does it depend on China for raw material supplies. We expect sales to be relatively resilient against this epidemic.

Excluding FX, FY19 core PATMI grew 18% y-o-y.

  • We note that the earnings acceleration was largely attributed to growth from the Vietnam and Ukraine markets, as well as the rationalisation of underperforming markets, such as Myanmar.
  • Vietnam is Food Empire’s second largest market now, and the group continues to grow its scale by expanding the reach of its distribution network. We estimate Vietnam sales to grow c.10% y-o-y last year, even though sales from South-East Asia dipped 1.8% y-o-y due to its exit from the Myanmar market.
  • Ukraine also delivered record profitability in FY19, as revenue grew on the back of a higher sales volume and steady appreciation of the UAH.

Management expects FY20 revenue to hit USD300m.

  • We believe this is achievable, and expect the group to surpass this target. Management believes that the RUB bottomed out at the end of last year. This would put Food Empire’s largest market, Russia, in good stead to deliver a stronger performance this year.
  • Currencies of other Commonwealth of Independent States (CIS) countries are fairly correlated to the RUB, which should remain stable in FY20, too. Meanwhile, its second-largest market, Vietnam, is expected to continue to expand with new product launches.
  • Lastly, the group’s instant freeze-dried coffee plant in India should commence commercial operations in 2H20. This should bring about a new stream of income to the group.

Change in earnings forecasts and Target Price.

  • We raise FY20-22 forecasts by 2-3%. This, together with an appreciation of the USD against the SGD, brings our Target Price to SGD0.88, pegged to 12x FY20F P/E.
  • We expect earnings to grow c.12% y-o-y in FY20, led by 7% y-o-y revenue growth and margin expansion. Margins are likely to improve in the absence of the Myanmar market, as well as stronger revenue growth in core markets. This should be partially offset by higher depreciation in its second coffee plant in India.

Yay to higher dividends.

Juliana Cai RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-02-26
SGX Stock Analyst Report BUY MAINTAIN BUY 0.88 UP 0.830