Food Empire - UOB Kay Hian 2021-01-18: Time For Re-rating On Outstanding Earnings Performance


Food Empire - Time For Re-rating On Outstanding Earnings Performance

  • We expect a re-rating on the back of strong earnings despite a challenging environment where Singapore consumer peers are suffering. Food Empire’s aggressive stock buy-back, mostly carried out in 4Q20 to Jan 21, underlines its confidence in its business outlook.
  • We raise our Food Empire's 2020-22 earnings per share forecasts by 4-12% on the back of stable demand.
  • At current Food Empire share price, the stock trades at a compelling 9.7x 2021F P/E.

Aggressive stock buy-back underlines confidence in business outlook.

Expect stable demand with positive retail sales in most core markets.

  • Retail sales in Ukraine and Kazakhstan have returned to positive y-o-y growth in 2H20. Similarly, retail sales in Food Empire’s second largest market, Vietnam, were fairly resilient and registered a growth of 6.0% in 2020. Although retail food sales in Russia have yet to return to positive growth, the pace of decline has narrowed to 4.6% in Nov 20 from -9.6% in May 20.
  • To recap, Food Empire's revenue from Russia in local currency terms grew y-o-y in 3Q20, suggesting resilient consumer demand for its products which we believe to be attributed to its strong brand equity and consumer-staple nature of its products.
  • Although there has been resurgence in COVID-19 cases in Eastern Europe, lockdowns in core markets are more targeted and imposed on a regional basis as compared to the stringent national lockdowns in 2Q20. Furthermore, Food Empire is now better prepared in handling a lockdown in terms of logistic and distribution issues experienced in 2Q20.

Resilient product offerings and strong brand equity.

  • Given low product prices, and the relatively inelastic and consumer-staple nature of its products, sales volumes are likely to be more sheltered from an economic slowdown, in our view.
  • Additionally, we highlight that in spite of the weaker currencies in its Eastern European markets and impact from stringent lockdowns in 2Q20, Food Empire has mitigated the impact to bottom line through ASP hikes and cost management. We are encouraged by its core earnings (excluding forex) growth of 11.2% y-o-y in 9M20 which we believe to be a prelude to better quarters ahead.

Compelling valuation.

  • Food Empire's share price is currently trading at an attractive 9.7x 2021F P/E, a significant discount to peers’ average of 20x 2021F P/E, despite its leading position in its core markets in Eastern Europe and a growing presence in Vietnam. In view of its resilient core earnings amid a challenging environment, we believe Food Empire is due for a re-rating.

Expect fairly resilient profit in Vietnam for 2020.

  • Food Empire’s second largest and fast growing market - Vietnam - has performed fairly well in 2020. 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 - Earnings revision & valuation

Joohijit Kaur UOB Kay Hian Research | Clement Ho UOB Kay Hian | https://research.uobkayhian.com/ 2021-01-18
SGX Stock Analyst Report BUY MAINTAIN BUY 0.880 SAME 0.880