Excerpts from UOB KH report

Analysts: Joohijit Kaur & Clement Ho

Time For Re-rating On Outstanding Earnings Performance  

We expect a re-rating on the back of strong earnings despite a challenging environment where Singapore consumer peers are suffering.

Food Empire

Share price: 
75 c

95 c

The group’s aggressive stock buyback, mostly carried out in 4Q20 to Jan 21, underlines its confidence in its business outlook.

We raise our 2020-22 EPS forecasts by 4-12% on the back of stable demand.

At current price, the stock trades at a compelling 9.7x 2021F PE.

Maintain BUY with an 8% higher target price of S$0.95.

Bosses AR2019

• Aggressive stock buy-back underlines confidence in business outlook. Since the start of the buy-back mandate on 23 Apr 20, Food Empire Holdings (FEH) has bought 3.08m shares, or 0.6% of its share base. This was mainly carried out in 4Q20 to Jan 21 where FEH bought back around 2.8m shares for around S$1.9m, potentially signaling a strong set of results for 4Q20 and confidence in its business outlook in 2021.

Expect stable demand with positive retail sales in most core markets. Retail sales in Ukraine and Kazakhstan have returned to positive yoy growth in 2H20. Similarly, retail sales in the group’s second largest market, Vietnam, were fairly resilient and registered a growth of 6.0% in 2020. Although retail food sales in Russia have yet to return to positive growth, the pace of decline has narrowed to 4.6% in Nov 20 from -9.6% in May 20.

To recap, revenue from Russia in local currency terms grew yoy in 3Q20, suggesting resilient consumer demand for its products which we believe to be attributed to its strong brand equity and consumer-staple nature of its products. Although there has been resurgence in COVID-19 cases in Eastern Europe, lockdowns in core markets are more targeted and imposed on a regional basis as compared to the stringent national lockdowns in 2Q20.

Furthermore, the group is now better prepared in handling a lockdown in terms of logistic and distribution issues experienced in 2Q20.

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. Additionally, we highlight that in spite of the weaker currencies in its Eastern European markets and impact from stringent lockdowns in 2Q20, the group has mitigated the impact to bottom line through ASP hikes and cost management. We are encouraged by its core earnings (excluding forex) growth of 11.2% yoy in 9M20 which we believe to be a prelude to better quarters ahead.

Compelling valuation. The stock is currently trading at an attractive 9.7x 2021F PE, a significant discount to peers’ average of 20x 2021F PE, despite its leading position in its core markets in Eastern Europe and a growing presence in Vietnam. In view of its resilient core earnings amid a challenging environment, we believe the stock is due for a re-rating.

Expect fairly resilient profit in Vietnam for 2020. The group’s second largest and fastgrowing market - Vietnam - has performed fairly well in 2020. While the group does not separately disclose Vietnam sales, its Southeast Asia segment (which includes Vietnam and Malaysia) registered only a slight sales decline of 2.6% yoy 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 yoy.

CafePho AR2019Cafe Pho is Food Empire's best-selling instant coffee in Vietnam.
Company photo.

• We lift our 2020 net profit forecast by 4.1% to US$28m as we push back depreciation charges in relation to its second instant coffee plant project on the delay in trial production to 1Q21.

For 2021-22, we raise our net profit forecasts to US$31m (+9.8%) and US$33m (+11.7%) respectively as we raise revenue and operating margin assumptions to factor in the resilient demand from its core markets.

Maintain BUY with a higher PE-based target price of S$0.95 (from S$0.88), based on 12.3x 2021F PE, in line with its long-term historical average (excluding outliers).

Our target price incorporates a slightly lower S$1.33/US$ (previously S$1.35).

Full report here

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