Food Empire - UOB Kay Hian 2020-11-13: 3Q20 Beat Expectations; Attractive Valuation At 8.1x 2021 PE


Food Empire - 3Q20 Beat Expectations; Attractive Valuation At 8.1x 2021 PE

  • Food Empire's 3Q20 core earnings of USS$9.0m was above expectations, 9M20 now constitutes 94% of our full-year estimate.
  • The beat came on better cost control which mitigated the decline in revenue. We expect fairly resilient demand going forward, given the consumer staple nature of its products, low price points and market-leading position.
  • We raise Food Empire's 2021-22 EPS forecasts by 8% and 4% respectively. Maintain BUY with a higher target price of S$0.88.

Food Empire's 3Q20 results above expectations.

  • Food Empire (SGX:F03) reported net profit of US$6.3m for 3Q20. Excluding forex impact, core net profit increased 3.1% y-o-y to US$9.0m. This brings 9M20 core earnings to US$23.3m (+11.2% y-o-y), which is a strong beat as it formed 94% of our full-year estimate.
  • The outperformance was largely a result of better-than-expected cost control and y higher core net margin.

Strong sequential recovery in revenue, tracking expectations.

  • Food Empire's 3Q20 revenue fell 8.5% y-o-y to US$70.3m but registered a strong sequential recovery at 19.8% q-o-q which is largely within our expectations. Revenue from Russia came in at US$27.5m, down 6.0% y-o-y but up 40% q-o-q (Russia implemented a lockdown in 2Q20). The y-o-y decline came as the ruble weakened against the USD towards end-3Q20.
  • The RUB/USD averaged 73.4 in 3Q20, inching up from 72.4 in 2Q20 and significantly weaker compared to 64.5 in 3Q19. On local currency terms, we estimate single-digit y-o-y growth.
  • A similar trend was seen at its Ukraine, Khazakhstan and CIS markets which recorded a decline of 8.2% y-o-y (+12% q-o-q). Southeast Asia sales fell 12.4% y-o-y (+1.4% q-o-q) as targeted lockdowns were implemented in Vietnam in 3Q20 but management guided sales have since recovered as these restrictions have been lifted.

Cost control mitigated lower sales.

  • Selling and marketing expense fell sharply by 35.7% y-o-y due to lower advertising and promotions expenses and manpower cost. This formed 11.3% of revenue in 3Q20 (2Q20: 15.7%, 3Q19: 16.1%) which was lower than what we had anticipated. With that, Food Empire's core net margin expanded 1.3ppt y-o-y to 12.8% in 3Q20, largely mitigating the impact on core earnings.

Demand remained stable.

  • Given the consumer staple nature of its products, low price points and its market-leading position, demand for Food Empire's products is relatively price inelastic and fairly resilient in the face of an economic slowdown, in our view. While there are concerns over rising COVID-19 cases in key markets in Eastern Europe, lockdowns in markets such as Russia have not been as drastic as the national lockdown in 2Q20 and are more targeted/imposed on a regional basis.
  • Furthermore, Food Empire is better prepared in handling a national lockdown in terms of issues such as logistics that were seen in 2Q20.

Expect fairly resilient profit in Vietnam for 2020.

  • Food Empire’s second largest and fast-growing market - Vietnam - performed fairly well. While the group does not separately disclose Vietnam sales, its Southeast Asia segment (which includes Vietnam and Malaysia) registered only a slight sales decline of 2.6% y-o-y in 9M20, in part from the exit of the Myanmar business and targeted lockdowns in certain provinces in Vietnam in 3Q20.
  • Management shared that sales have since recovered and profitability of its Vietnam business should improve y-o-y.

Food Empire - Valuation & Recommendation

Undemanding valuation for a market leader and consumer staple player.

  • Food Empire's share price is currently trading at an attractive 8.1x 2021F PE, a significant discount to peers’ average of 20x 2021F PE despite its market-leading position in its core markets in Eastern Europe and a growing presence in Vietnam.

Joohijit Kaur UOB Kay Hian Research | Clement Ho UOB Kay Hian | https://research.uobkayhian.com/ 2020-11-13
SGX Stock Analyst Report BUY MAINTAIN BUY 0.88 UP 0.850