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

FOOD EMPIRE HOLDINGS LIMITED (SGX:F03)

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.

Since the start of the buy-back mandate on 23 Apr 20, Food Empire (SGX:F03) has bought 3.08m shares, or 0.6% of its share base. This was mainly carried out in 4Q20 to Jan 21 where Food Empire bought back around 2.8m shares for around S$1.9m, potentially signaling a strong set of results for 4Q20 and confidence in its business outlook in 2021. See SGX companies' latest share buyback transactions.

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.

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.

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.

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.

We lift our Food Empire's 2020 net profit forecast by 4.1% to US$28m as we push back depreciation charges in relation to its second instant coffee plant project on the delay in trial production to 1Q21.
For 2021-22, we raise our net profit forecasts to US$31m (+9.8%) and US$33m (+11.7%) respectively as we raise revenue and operating margin assumptions to factor in the resilient demand from its core markets.
Maintain BUY with a higher target price based on 12.3x 2021F P/E, in line with its long-term historical average (excluding outliers). Our target price incorporates a slightly lower S$1.33 (previously S$1.35) vs US$1.
See Food Empire Share Price; Food Empire Target Price; Food Empire Analyst Reports; Food Empire Dividend History; Food Empire Announcements; Food Empire Latest News.

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