Food Empire - UOB Kay Hian 2020-08-13: 1H20 Beat Expectations; Expect Better Quarters Ahead & Raise Target Price By 35%

FOOD EMPIRE HOLDINGS LIMITED (SGX:F03)

Food Empire - 1H20 Beat Expectations; Expect Better Quarters Ahead & Raise Target Price By 35%

Food Empire's 1H20 core earnings grew 8% y-o-y and formed 70% of our 2020 estimate. 2Q20 core earnings of US$4m was above our expectation of a zero profit.
We expect the next two quarters to be better as we believe that the worst is over for Food Empire's key markets, especially Russia. In our view, Food Empire’s product and brand strength is very evident in this result. We raise 2020F and 2021F EPS by 31% and 6% and roll over our valuation base year to 2021.

We increase our target price by 35% to S$0.85 (12.3x 2021F PE) and maintain BUY.

Food Empire (SGX:F03) reported net profit of US$13.4m for 1H20. Excluding forex, core net profit increased 7.9% y-o-y in 1H20 but fell 24% y-o-y in 2Q20 to S$3.9m. 1H20 earnings formed 70% of our full-year estimates and was above our expectations as we were expecting a slightly above breakeven position for 2Q20.

Revenue fell 13.4% y-o-y and 4.0% y-o-y to S$58.7m and S$132.9m in 2Q20 and 1H20 respectively and was slightly above expectations as we had expected steeper declines in revenue from Russia and CIS markets. The decline in revenue was attributed to lockdowns across some of the group’s core markets which resulted in lower footfall of consumers in retail outlets.
The steepest decline in revenue in 2Q20 was from Russia which fell 22% y-o-y to S$19.7 as a result of the nationwide lockdown and also lower translated revenue due to the depreciation of the Russian rouble.
Similarly, revenue from Ukraine, Kazakhstan and CIS markets declined 15.6% y-o-y to S$14.3m in 2Q20 while revenue from its Southeast Asian market remained resilient, increasing 1.1% q-o-q in 2Q20 and 3.4% y-o-y in 1H20.

Gross profit margin in 2Q20 rose 1.4ppt to 39.2%. This was achieved in spite of weaker currencies for some of its core markets, especially the Russian rouble which averaged at 72.4 per USD in 2Q20 compared with 64.5 in 2Q19. Management attributed this to a series of gradual ASP increases for its products in some of its key markets with effect from Apr 20.

Although some of Food Empire’s markets where COVID-19 cases remain high are still under partial lockdown, the restrictions are less stringent and have been gradually eased since May-Jun 20.
Russia, the group’s largest revenue contributor, has started gradually lifting restrictions that were imposed during the national lockdown since early-Jun 20. Ukraine’s lockdown has been extended to Aug 31 but has been partially eased since May.
As for Kazakhstan, a new less-stringent 14-day lockdown has been imposed since early July and has been extended for two weeks in Aug 20. In line with the gradual resumption of activities in 2H20 post the stringent lockdowns in 2Q20, management expects business activities to pick up going into 2H20.
Additionally, management shared that Vietnam, Food Empire’s second largest revenue contributor, has seen sales slowly revert to pre-COVID-19 levels.

We also highlight that the Russian rouble has strengthened against the USD to 73 as at 12 Aug 20 and averaging at 72.4 in 2Q20, compared with the low of 77-79 in Mar 20. In our view, the stabilisation of the currency should help to support gross profit margin given that majority of the group’s raw materials are denominated in USD.

We raise our Food Empire's 2020, 2021 and 2022 earnings to S$24.9m (+30.6%), S$27.0m (+5.7%) and S$28.3m (+1.3%) as we incorporate higher revenue (1.7-6.4%), gross margin (0.1-0.2ppt) and net profit margin (0.2-1.7ppt). The adjustment is to reflect the stronger-than-expected results, higher revenue from stronger recovery, better cost control and the improvement of the Russian rouble against USD.
We now expect net profit to decline marginally by 2.4% y-o-y for 2020 and rebound by 8.6% in 2021.

Maintain BUY on Food Empire with a higher PE-based target price of S$0.85, up from S$0.63. This is based on 12.3x 2021F PE (previously: 12.6x 2020F PE), in line with its long-term historical average (excluding outliers). We have rolled over our valuation base to 2021. Our target price for Food Empire also incorporates a slightly lower S$/US$ rate of 1.37 from 1.40 previously.
See Food Empire Share Price; Food Empire Target Price; Food Empire Analyst Reports; Food Empire Dividend History; Food Empire Announcements; Food Empire Latest News.
At current Food Empire Share Price, the stock trades at an attractive valuation at 8.1x 2021F PE, a significant discount to peer average of 20x for 2021F, suggesting that the rouble depreciation and impact from COVID-19 have been priced in.

Joohijit Kaur UOB Kay Hian Research | Clement Ho UOB Kay Hian | https://research.uobkayhian.com/ 2020-08-13

SGX Stock Analyst Report BUY MAINTAIN BUY 0.85 UP 0.630