Food Empire - RHB Invest 2020-08-14: More Resilient Than Expected; Maintain BUY


Food Empire - More Resilient Than Expected; Maintain BUY

  • Food Empire (SGX:F03) booked resilient 1H20 results, with 1H20 PATMI staying stable at USD13.4m, despite a 4% y-o-y decline in sales. Most of the sales decline occurred in 2Q20, when business activities were disrupted by lockdowns in most markets. It also faced currency volatilities, from exposure to emerging markets. However, earnings remained stable on cost containment measures and selling price adjustments.
  • Food Empire's earnings should improve since more countries are easing lockdown restrictions. BUY, SGD0.75 Target Price, 21% upside with c.3% FY20F yield.

Sales disrupted by lockdowns and movement restrictions in 2Q20.

  • Food Empire's 1H20 revenue declined 4% y-o-y to USD133m. We note that the bulk of the decline occurred in 2Q20, when sales fell 13% y-o-y. In particular, revenue from Russia (c.30-40% of total sales), its biggest market, dropped 22% y-o-y in 2Q20. This was due to the disruptions from the 12 weeks of national lockdown – which led to lower consumer foot traffic in retail, and supply chain challenges for distributors.
  • The RUB depreciation further impacted sales, but this was partially mitigated by adjustments on selling prices that were made in stages.
  • Food Empire’s coffee plant in India also saw a major decline in sales, as it faced production disruption and cancellation or postponement of orders due to COVID-19 lockdowns. The lower sales in 1H20 were partially offset by a c.3% y-o-y growth in Ukraine, Kazakhstan and Commonwealth of Independent States (CIS) markets, as well as South-East Asia, where sales volumes were resilient and selling prices increased.

Cost containment initiatives helped.

  • In view of the challenging operating environment brought upon by the COVID-19 pandemic, management focused on profitability and rationalised sales-related expenses. General and administrative costs also dropped by USD2m, as it cut manpower, transportation and travel costs during this period.

Earnings to pick up in 2H20F.

  • As Russia eased its restrictions, Food Empire's management highlighted that July and August sales have recovered to > 90% of pre-COVID levels.
  • On the other hand, Kazakhstan and Vietnam have implemented another round of lockdowns to combat the resurgence of COVID-19 infections. Fortunately, the second round of lockdowns were not as strict as the first – and we do not expect the impact to be worse than what it was in 2Q20. Although there could be short-term disruptions to sales – from movement restrictions and supply chain challenges – we do not expect consumer demand for Food Empire’s products to be severely impacted by COVID-19, due to its staple nature and low price points. Sales are likely to normalise once the COVID-19 situation in the markets plateau, and consumers become used to the new normal.
  • See Food Empire Share Price; Food Empire Target Price; Food Empire Analyst Reports; Food Empire Dividend History; Food Empire Announcements; Food Empire Latest News.
  • Maintain BUY on Food Empire, with our SGD0.75 Target Price pegged to 12x P/E.

Juliana Cai RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-08-14
SGX Stock Analyst Report BUY MAINTAIN BUY 0.750 SAME 0.750