Food Empire - RHB Invest 2020-05-14: Expecting Temporary Blip In 2Q; Keep BUY


Food Empire - Expecting Temporary Blip In 2Q; Keep BUY

  • Maintain BUY with new Target Price SGD0.75 from SGD0.88, 47% upside and c.3% yield.
  • Food Empire's 1Q20 net profit was USD6.6m (-13% y-o-y) largely due to FX losses. Excluding FX, core net profit came in strongly at USD9.5m, (+33% y-o-y), accounting for 33% of our estimates – in line.
  • We however cut our FY20F-22F core profit by 17%, 11%, and 10% as we expect more impact from currency depreciation and COVID-19 in 2Q20. This lowers our Target Price pegged to 12x FY20F P/E.

Food Empire's 1Q20 revenue recorded 5% growth

  • According to management, Food Empire (SGX:F03) saw stronger sales across all markets in local currency terms during the quarter. This was attributed to rising sales of newer products, better product mix and general improvement in consumer sentiment at the start of the year.
  • Russia, however, registered a 2% y-o-y sales decline in USD terms due to the sharp RUB depreciation resulted from the oil crisis. Excluding FX losses, core profit surged 33% y-o-y to USD9.5m as selling and administration costs were kept fairly stable despite improving sales. Gross margin also expanded 0.2ppt y-o-y to 40.4%.

2Q20 likely to take a turn for the worse

  • 2Q20 likely to take a turn for the worse with various markets being in some form of lockdown due to the COVID-19 pandemic while Russia and most of the CIS countries are seeing the full quarter impact of currency depreciation. Sales volume in Russia and some of the CIS markets should be more severely impacted as footfall declined sharply for grocery retail.
  • Vietnam, however, is not likely to be severely impacted due to the lower number of COVID-19 cases. The second instant coffee plant in project, scheduled for completion in mid-2020, is also likely to see some delays due to international travel restrictions.

Not all bleak and gloomy.

  • Our sensitivity test suggests that 5% depreciation of the RUB could lower earnings by c.15%, all else unchanged. To mitigate the negative FX impact, we note that Food Empire has implemented c.10% price increase in certain key markets and we expect to see the full impact of the price hike in 3Q20. Commodity prices have also fallen as a result of weaker global demand.
  • In addition, Food Empire is now shifting its focus to higher-margin sales rather than chase topline growth to ensure sustainable profitability. Given it is largely in the staple food business, we believe that full-year sales volume would remain resilient as a whole. We expect sales volume to pick up once the lockdown eases in 3Q20 for most cities.
  • See Food Empire Share Price; Food Empire Target Price; Food Empire Analyst Reports; Food Empire Dividend History; Food Empire Announcements; Food Empire Latest News.
  • Nevertheless, we cut Food Empire's FY20F-22F revenue by 7%, 5%, and 4% and core profit by 17%, 11%, and 10% due to weaker currency and economic outlook in some of its key markets. This in turn lowers our Target Price to SGD0.75.
  • Key risks to Food Empire are volatility in the RUB and prolonged lockdown.

Juliana Cai RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-05-14
SGX Stock Analyst Report BUY MAINTAIN BUY 0.75 DOWN 0.880