Food Empire - UOB Kay Hian 2021-05-14: 1Q21 Results In Line; Robust Growth In Southeast Asia

FOOD EMPIRE HOLDINGS LIMITED (SGX:F03)

Food Empire - 1Q21 Results In Line; Robust Growth In Southeast Asia

Food Empire’s 1Q21 net profit of US$6.8m (+3.9% y-o-y) forms 22% of our full-year estimates. Higher revenue from its Southeast Asia segment mitigated lower sales from Russia and the CIS markets, which faced logistical issues. While gross margin fell, net margin remained stable.
We expect revenue recovery, better scale in Vietnam and stable net margins to drive earnings in 2021. Also, the logistical challenges should ease in the coming quarters.
Maintain BUY and target price of S$1.30, based on 16.6x 2021F P/E.

Food Empire (SGX:F03) reported net profit of US$6.8m (+3.9% y-o-y) for 1Q21, which accounts 22% of our full-year forecast, in line with expectations.

Revenue rose 3.4% y-o-y to US$76.8m in 1Q21, translating to a sequential recovery at 10.1% q-o-q, which is largely within our expectations. Revenue from Russia fell 2.4% y-o-y while revenue from the group’s Ukraine, Kazakhstan and CIS markets registered a steeper decline of 8.6% y-o-y. The drop in sales in these markets was largely related to logistical and supply chain delays at ports of discharge due to the lack of shipping containers worldwide.
The decline in Food Empire’s CIS and Russia markets were largely offset by higher sales contribution from its Southeast Asia which saw a 22.2% y-o-y jump in sales to US$24.1m, driven by robust growth in Vietnam and Malaysia. South Asia’s revenue also held steady at US$2.5m, compared to US$2.1m in 1Q20. We expect the logistical challenges to ease gradually in the coming quarter.

Selling and marketing expense declined 9.0% y-o-y while administrative expense fell 9.3% y-o-y. On the flip side, higher commodity prices and freight related expenses lead to a lower gross profit margin of 33.6%, down 6.8ppt compared with 40.4% in 1Q20. With that, net profit margin was largely unchanged at 8.9% in 1Q21.

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

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 more sheltered from an economic slowdown, in our view.

Food Empire currently trades at 11.2x 2021F P/E vs peers’ average of 25x. In view of its resilient core earnings amid a challenging environment, its 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.

John Cheong UOB Kay Hian Research | Clement Ho UOB Kay Hian | https://research.uobkayhian.com/ 2021-05-14

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