Report by Lim & Tan Securities

We maintain our “ACCUMULATE” call on Food Empire ($0.595, unchanged) with a TP of S$0.72 based on a P/E of 11.0x, representing an upside potential of 21% from current level.

Food Empire

Share price: 
59.5 c

72 c

Despite 9M2020 NPAT falling by 6.6% YoY to US$19.4mln, we atrribute this mainly to foreign exchange loss faced in 3Q2020.

On an operating level (assuming forex losses remained the same as that of 3Q2019), FEH would have marked a YoY increase in 3Q NPAT of c.3.5% instead of a 19.5% decline.

We conservatively estimate FY20F NPAT to come in at US$24.6mln and a dividend per share of 2.0 S-cents, representing a forward dividend yield of 3.4%.

Moving forward, we believe in FEH’s long term fundamentals as the instant coffee market is set to recover post COVID-19.

maccoffee variants

FEH’s products have also gained popularity and pricing power in new markets while retaining their entrenched brand equity in older markets.

Further, management’s continued share buybacks exhibit their confidence in the business and the unwarranted low share price.

According to Technavio Research, impact of COVID-19 on the global instant coffee market has been relatively muted.

This suggests that its fundamentals have not been affected and market growth still remains in sight.

From 2020-2024, Technavio is expecting the instant coffee market to grow by USD8.88bln, accelerating at a CAGR of more than 5%.

Approximately 45% of the global instant coffee market’s growth is expected to originate from the Asia Pacific region, where FEH operates in.

Barring the effects of the foreign exchange loss, we think that FEH’s business has proven resilient in the face of COVID-19.

For 3Q2020, assuming forex loss remained the same YoY, FEH would have made a profit of US$8.0mln, representing a 3.5% growth in NPAT.

Similarly, for 9M2020, had forex losses remained flat YoY, they would have registered an 11.3% growth in NPAT.

Bullish on fundamentals
"Operationally, we remain bullish on FEH’s fundamentals considering that management has strict cost control measures in place as well as a continuous focus on geographical diversification in search of expansion opportunities.

"Also, we opine that they will continue gaining market share in Vietnam along with the growth of the instant coffee market."

-- Lim & Tan Securities

Although COVID-19 has weighed on short term profitability, we like that management has continued with their share buybacks, with the latest transaction occurring on 03 Dec 2020.

This shows their continued confidence in FEH’s business prospects.

Share repurchases were restarted in 2019.

As at the time of publication, FEH has repurchased a total of 1.9mln shares in 2020 at an average price of S$0.58 per share.

This somewhat reflects a support in share price as FEH has been steadily trading between S$0.57 to S$0.63 since August 2020.

AGM twc4.14Food Empire chairman Tan Wang Cheow at an AGM. File photo
At the current price of S$0.595, FEH trades at 9.1x P/E and 5.2x EV/EBITDA compared to the local peer average of 13.5x P/E and 13.9x EV/EBITDA.

We think that the market is still undervaluing the business in spite of its strong business fundamentals as well as COVID-19 weighing down on consumer counters.

With the instant coffee market projected to grow, Russia being a cash cow and FEH gaining market share in Vietnam, we remain positive on the company’s prospects and peg our TP to 11.0x P/E – representing a 19% discount to the local peer average of 13.5x.

With increased coverage and greater geographical diversification efforts, we opine that this will lead to an upward re-rating of FEH by the market as management brings greater value to shareholders.

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