Food Empire - UOB Kay Hian 2020-02-05: Huge Bargain For Coffee Mix Player With Global Footprint

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FOOD EMPIRE HOLDINGS LIMITED (SGX:F03)

Food Empire - Huge Bargain For Coffee Mix Player With Global Footprint

• Food Empire (SGX:F03) is a dominant coffee mix player in CIS countries. Following the collapse of the Russian ruble in 2014, the group has successfully diversified its sales through deepening its penetration in emerging markets.
• Moving forward, its earnings base should be further lifted by margin expansion on cost rationalisation and steady sales growth.
• Trading at 9.2x 2020F PE vs > 20x for its regional peers, valuation is due for re-rating in our view.
• Initiate coverage with BUY.

INVESTMENT HIGHLIGHTS

Coffee mix market leader in CIS countries with successful diversification efforts.

• Food Empire (SGX:F03)’s flagship brand, MacCoffee, is the leading 3-in-1 coffee mix brand in Commonwealth Independent States (CIS) countries. With its strong brand equity and broad network of distributors, it commands the largest market share of Russia’s coffee mix market.
• Sales contribution from Russia was about 60% prior to the ruble’s collapse in 2H14 but has since fallen to 40%, mainly due to its geographic expansion into regions such as Vietnam and diversification efforts into the upstream business.

Successful entry into Vietnam.

• Food Empire has successfully gained entry into Vietnam through its iced coffee mix product, Café Pho, which was launched in 2013. Café Pho is among the top 5 leading brands by volume share and a top 3 player based on value share in the Vietnam 3-in-1 coffee mix market.
• Revenue from Indochina, which includes Vietnam, grew nearly fivefold from US$10.5m in 2014 to US$50.4m in 2018. The Vietnam business contributes close to 18% of top-line, making it Food Empire’s second-largest market and its stronghold in Asia.
• We believe Food Empire will be able to continue to gain market share through the introduction of new products, leveraging on its extensive network of distributors and sales representatives in Vietnam.

Strengthening margin from cost rationalisation.

• Efforts to streamline operations and the exit of its loss-making Myanmar business improved 9M19 reported net margin by 2.6ppt to 9.8%. The group is set to have pulled off a record year in 2019 (highest level of reported net profit), underpinned by stable revenue growth coupled with margin expansion.
• With management’s focus on key markets and less of a drag from underperforming markets, margin should continue to trend upwards.

STOCK IMPACT

Margin expansion coupled with steady revenue growth to drive bottom-line.

• We estimate a net margin increase of 2.5ppt and 0.3ppt in 2019 and 2020 respectively as we expect cost savings from the streamlining exercise and improvement in scale. With a stable revenue growth, we forecast earnings to grow at 9.4% CAGR for 2019-21. We note that 2019 is set to be a record year for the group as it reports the highest level of net profit.

Geographic and upstream investments relieve concentrated risks.

• We estimate revenue contribution from CIS countries (including Russia) at 63% for 2019, significantly lower compared with the 85% prior to the ruble crisis in 2014 as the sales growth in Indochina and other markets outpaces that of CIS countries.
• Going forward, we expect Food Empire’s more mature markets to see stable mid to high single-digit revenue growth and its emerging markets to clock meaningful growth in the low-teen range.
• See Food Empire Share Price; Food Empire Target Price; Food Empire Analyst Reports; Food Empire Dividend History; Food Empire Announcements; Food Empire Latest News.

VALUATION/RECOMMENDATION

Initiate coverage with a BUY.

• This is based on 12.5x 2020F PE, in line with its long-term historical average (excluding outliers). At current prices, the stock trades at an attractive valuation at 9.2x 2020F PE, signicantly lower compared to peers’ average of 22x. We attribute this to the lack of street coverage, and visibility should improve given its:
  1. wider core earnings base,
  2. reduced geographical dependency, and
  3. operational leverage at the tipping point.
• In addition, we note that SGX-listed peers including Super Group and Viz Branz were acquired and privatised at significantly higher valuations of 30.0x and 16.4x respectively.
• For complete analysis, see attached 20-page initiate coverage report.

SHARE PRICE CATALYST

• Higher-than-expected volume growth.
• Earnings-accretive M&A opportunities.
• Better-than-expected performance of currencies in key markets.

Joohijit Kaur UOB Kay Hian Research | Clement Ho UOB Kay Hian | https://research.uobkayhian.com/ 2020-02-05

SGX Stock Analyst Report BUY INITIATE BUY 0.89 SAME 0.89