Excerpts from RHB report
Analyst: Jarick Seet
| BUY, new SGD1.27 TP from SGD0.80, 44% upside with c.3% yield. Due to COVID-19 and mass distribution of vaccines, we expect demand for Food Empire products to grow.
Margins should improve on growing demand, while the RUB appreciation should drive strong earnings growth of 24.7% YoY for FY21F. This report marks the transfer of coverage to Jarick Seet.
The worst is over. While FY20 revenues were down YoY across all the markets, it has improved robustly QoQ since 2Q20.
Management highlighted that demand for its instant coffee products has been stable. Previously, strict national lockdowns resulted in operational and logistical issues – which in turn caused a temporary decline in sales volume last year.
Since then, management has learnt to solve these problems, and does not expect such matters to be repeated. Demand should be resilient ahead, increasing in 4Q20F and FY21F.
Note that 3Q20 earnings grew YoY, despite declining 6% QoQ due to the impact of FX fluctuations. Excluding FX, 3Q20 earnings would have grown by an impressive 87% QoQ.
Strong rebound in FY21F. We expect Food Empire to close FY20 with decent numbers, and its FY21 performance to improve even further.
We increased FY20-22F recurring PATMI by 10%, 20% and 5%. As such, our TP rises to SGD1.27, pegged to a higher 15x FY21F P/E (from 11x).
To compare, its local and regional staple foods peers are trading at significant premiums of 20-30x.
We also applied a discount to account for the volatile fluctuation in the value of the RUB, even though Food Empire can negate the effect of this by adjusting its selling prices.
The value of the RUB increased at the end of Nov 2020 – which may benefit group numbers. We expect Food Empire to maintain its FY20 final and special DPS at 2 SG cents, which translates to a FY20F yield of 2.6%.
| One of the cheapest consumer staples counters. At a market valuation of 10x FY21F P/E, Food Empire is one of the cheapest consumer staples stocks.
As the company has a proven track record and its peers are trading at 20-30x P/E – on top of it being a market leader in Russia and Ukraine – we remain bullish on this stock and make no change to our strong BUY call.
It could even be a candidate for privatisation, given its undervalued position.
Management has been buying back shares aggressively in Dec 2020 and January, having acquired stock at SGD0.76 per share on 21 Jan (before the blackout period).
Key risks: Strict nationwide lockdowns that result in operational disruptions, and a sharp depreciation in the RUB and currencies of related Commonwealth of Independent States (CIS).
Full report here.