Food Empire - UOB Kay Hian 2021-02-26: 2020 Another Year Of Record Earnings & Dividend; Expect A Better Year Ahead

FOOD EMPIRE HOLDINGS LIMITED (SGX:F03)

Food Empire - 2020 Another Year Of Record Earnings & Dividend; Expect A Better Year Ahead

Food Empire reported core earnings of US$29m (+14% y-o-y), pulling off another year of record earnings and forming 104% of our estimates. Cost control and higher profitability from its Southeast Asia segment mitigated lower sales from the CIS markets.
In our view, the results are a testament to Food Empire’s strong brand equity and experience in navigating currency devaluations. We expect a sales recovery and stable margins to lift earnings going forward.
Maintain BUY with target price of S$1.30.

Food Empire (SGX:F03) reported net profit of US$26.8m for 2020, pulling off another record earnings. Excluding a forex loss of US$2.3m, core net profit increased 14.0% y-o-y to US$29.1m, which formed 104% of our estimates.

Food Empire's revenue fell 6.7 y-o-y to US$140m in 2H20 but registered a sequential recovery of 5.3% h-o-h, which is largely within our expectations. This brings full-year revenue to US$273m, down 5.4% y-o-y.
Management also shared that Southeast Asia which registered a revenue growth of 3.5% y-o-y in 2020 also improved in terms of profitability. In 2020, selling and marketing expenses fell by 13.3% y-o-y due to lower advertising and promotion expenses and manpower costs.
Similarly, administrative expenses fell 12.7% y-o-y. Despite the steep devaluation of currencies in Food Empire’s core markets, the gross profit margin for the year was decent at 38.3%, down 0.4ppt as the group took active measures to mitigate the impact through gradual ASP hikes. With that, Food Empire's core net profit margin expanded 1.9ppt to 10.7% in 2020, offsetting the decline in revenue.

Food Empire has proposed a first and final dividend of 2.2 cents per share which translates to a higher payout ratio of 33% compared with 30% in 2019. We expect a similar level of payout in 2021, backed by its sustainable cash flow and net cash position. Based on current prices, we estimate a dividend yield of 2.5%.

Despite challenges in 2020 including currency devaluation in core markets and national lockdowns, Food Empire has managed to generate a record level of profits. We believe this is a testament to its strong brand equity and experience in navigating volatile currencies.
Furthermore, given the low price point and consumer staple nature of its products, the products are relatively price inelastic. As such, sales volumes are more sheltered from an economic slowdown, in our view.

Food Empire currently trades at 12x 2021F P/E vs regional peers’ average of 25x. 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 the possibility of a takeover offer or privatisation.
Besides, 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.

Since the start of the buy-back mandate on 23 Apr 20, Food Empire has bought 3.3m shares, or 0.6% of its share base. This was mainly carried out from 4Q20 to Jan 21 where Food Empire bought back around 3.0m shares for around S$2.0m, signaling confidence in its business outlook in 2021.

With the gradual reopening of economies on the back of global efforts to increase the COVID-19 vaccine adoption rate, our forecast incorporates a 9.4% increase in revenue. Furthermore, Food Empire’s increasing scale in Vietnam, efforts to streamline its operations, exit its loss-making Myanmar business and its ability to raise ASP during core market currency weakness has improved its overall margins over the years while maintaining stable revenue.
We expect a stable net margin going forward, but 0.3ppt lower in 2021 to account for depreciation of the second India plant

We maintain our net profit forecasts of Food Empire for 2021-22 at US$31m and US$33m respectively and introduce 2023 estimates of US$35m.

John Cheong UOB Kay Hian Research | Clement Ho UOB Kay Hian | https://research.uobkayhian.com/ 2021-02-26

SGX Stock Analyst Report BUY MAINTAIN BUY 1.30 SAME 1.30