Food Empire - UOB Kay Hian 2021-09-02: 1H21 Below Expectations Due To Costs; Price Increase Should Improve Earnings

FOOD EMPIRE HOLDINGS LIMITED (SGX:F03) | SGinvestors.io FOOD EMPIRE HOLDINGS LIMITED (SGX:F03)

Food Empire - 1H21 Below Expectations Due To Costs; Price Increase Should Improve Earnings

  • Food Empire’s 1H21 net profit of US$11.5m (-13.2% y-o-y) is below expectation, forming 37% of our full-year estimate. Margins came under pressure due to high commodity prices and record-high ocean freight rates. We believe earnings should improve via price increases and normalisation of costs.
  • All markets recorded sales growth, with double-digit growth in its two largest markets, Russia and Southeast Asia. This continues to reflect Food Empire’s strong brand power.
  • Maintain BUY rating on Food Empire.



Results below expectations due to higher costs which led to margin pressure.

  • Food Empire (SGX:F03)’s 1H21 net profit of US$11.5m (-13.2% y-o-y) is below expectation, accounting for 37% of our full-year estimates. The miss was mainly due to lower margin as a result of:
    1. higher commodity prices,
    2. record-high ocean freight rates,
    3. a shortage of shipping container slots which resulted in supply chain delays, and
    4. higher depreciation expenses arising from commencement of the group’s new freeze-dry coffee plant in India.
  • Gross margin fell 7.7ppt to 32.2%.

Revenue growth across all markets, especially the two largest ones.

  • Revenue for 1H21 grew 12.5% y-o-y as most markets recovered from a harsh lockdown last year. Food Empire’s two largest markets reported encouraging double-digit sales growth in 1H21 - Russia (+12.8%) and Southeast Asia (+13.2%). The third largest market, which consists Ukraine, Kazakhstan and CIS, also recorded 4.3% y-o-y revenue growth.

Expect cost pressures to be overcome by price increases and normalisation of costs.

  • Given its strong brand power and market-leading position, Food Empire will be reduce with higher vaccination rates across the world.


STOCK IMPACT

  • Growing target. Food Empire trades at 10x 2022F 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.


EARNINGS REVISION

  • We reduce our 2021 earnings forecast by 20% as we reduce our gross margin forecast by 2.2ppt to 36.1%. This is to account for the higher raw material and logistics costs as a result of COVID-19 disruption. However, we believe this situation is temporary in nature. Hence, we only reduce our 2022 and 2023 earnings estimates by 6% after reducing our gross margin assumption by around 1ppt to 38%.


VALUATION & RECOMMENDATION






John Cheong UOB Kay Hian Research | Clement Ho UOB Kay Hian | https://research.uobkayhian.com/ 2021-09-02
SGX Stock Analyst Report BUY MAINTAIN BUY 1.300 SAME 1.300



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