Food Empire - UOB Kay Hian 2021-02-09: Expect Another Year Of Record Earnings; Raise Target Price By 37% To S$1.30


Food Empire - Expect Another Year Of Record Earnings; Raise Target Price By 37% To S$1.30

  • While Food Empire's share price has increased 22% since we raised our target price on 18 Jan 21, we see room for upside as valuation remains attractive at 12x 2021F P/E vs peers’ average of 25x.
  • We expect another record year for core earnings from Food Empire, underpinned by an improvement in margins. In view of its resilient core earnings amid a challenging environment and leading position in core markets, we believe Food Empire deserves to trade at a higher valuation.
  • Maintain BUY with a 37% higher target price of S$1.30.

Compelling valuation; potential takeover target.

  • Since our report Food Empire - UOB Kay Hian 2021-01-18: Time For Re-rating On Outstanding Earnings Performance, Food Empire's share price has increased 22%.
  • Re-iterate BUY on Food Empire (SGX:F03) as we believe there is still room for upside given that valuation remains cheap at 12x 2021F P/E, in comparison to regional peers’ average of 25x 2021F P/E. In view of its resilient core earnings amid a challenging environment, leading position in its core markets in Eastern Europe and growing presence in its second-largest market, Vietnam, we believe the valuation gap with its peers will narrow.
  • Furthermore, given the depressed valuation, we do not rule out a possibility of a takeover offer or privatisation.
  • In addition, in the past, SGX-listed peers including Super Group and Viz Branz were acquired and privatised at significantly higher valuations of 30.0x and 16.4x respectively.
  • We raise our Food Empire's target price to S$1.30 on a higher valuation multiple of 16.6x 2021F P/E, or 1SD above its historical average mean P/E, as we opine the group deserves to trade at a higher valuation.

Expect another year of record core earnings.

  • Food Empire is set to pull off a record year in 2020 in spite of operational and logistical issues faced in 2Q20 (due to stringent lockdowns in core markets). Underpinned by ASP hikes and cost management, the decline in revenue in 2020 would be offset by better margins, in our view. As such, our forecast incorporates 10.2% y-o-y growth in core earnings to US$28m for 2020, the group’s highest level of core net profit (excluding forex loss) since its listing.

Stable top-line and improving margin to lift earnings.

  • Food Empire’s increasing scale in Vietnam, efforts to streamline its operations, exit of its loss-making Myanmar business and ability to raise ASP during core market currency weakness have improved its overall margins over the years, whilst maintaining stable revenue. Core margin rose 1.2ppt in 2019 and we expect continued margin expansion of 1.4ppt to 10.3% in 2020F.

Aggressive stock buyback underlines confidence in business outlook.

  • Since the start of the buyback mandate on 23 Apr 20, Food Empire has bought 3.3m shares, or 0.6% of its share base. This was mainly carried out in 4Q20 to Jan 21 when Food Empire bought back around 3.0m shares for around S$2.0m, potentially signalling a strong set of results for 4Q20 and confidence in its business outlook in 2021.

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.

Expect higher profit in Vietnam for 2020.

  • Food Empire’s second largest and fast-growing market, Vietnam, has performed fairly well in 2020. While Food Empire 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.

Maintain earnings forecast.

John Cheong UOB Kay Hian Research | Clement Ho UOB Kay Hian | https://research.uobkayhian.com/ 2021-02-09
SGX Stock Analyst Report BUY MAINTAIN BUY 1.35 UP 0.950