Excerpts from RHB Research report

Analyst: Juliana Cai

Management told us that its core markets in the CIS countries grew in line with its expectation, in local currency terms, in 2Q17.

ndc3.14Food Empire's non-dairy creamer plant in Johor: Contributed to a surge in revenue under "other markets" segment. NextInsight file photoMoreover, its upstream projects, operating at utilisation rates of around 70-80%, also saw satisfactory sales contributions.

Food Empire

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As its plants are running at almost full utilisation rates, we think there may be potential expansion from the upstream projects, moving forward.

Maintain BUY, with a TP of SGD0.95 (44% upside) implying 18x FY17F P/E.

Russia, Ukraine, Kazakhstan and other Commonwealth of Independent States (CIS) markets. In our 12 Aug results note titled Food Empire Holdings: Still a currency play, we highlighted that sales from the CIS markets were probably largely affected by currency fluctuations.

Management confirmed our assumption and said that its core markets are mature markets. As such, they have grown at a single-digit rate, as a whole, in local currency terms.

Management also believes that the USD/RUB rate has stabilised at about 60 RUB per USD – which falls within its budgeted range. Barring any major movement in the RUB, we believe that its gross margin may widen as we had forecasted.

Upstream projects may be a future growth driver. Food Empire’s best-performing geographical segment for 2Q17 was under its “other markets” classification.

Sudeep TanCEO Sudeep Nair and Executive Chairman Tan Wang Cheow. NextInsight file photoSales from this segment surged 62% YoY and 16% QoQ, which was mainly attributed to its non-dairy creamer (NDC) plant in Malaysia and instant coffee plant in India.

We understand that these plants are operating at utilisation rates of 70-80%. Should sales volumes continue to grow, we think management may choose to expand these upstream projects.

Currently, the group’s snack plant in Malaysia is also operating at a 80% utilisation rate, and management plans to add an additional line to this facility. As such, we lift our capex projection by another USD4m to reflect this.

Maintain BUY, with a TP of SGD0.95 pegged to 18x FY17F P/E. As Food Empire’s 1H17 results are in line with our expectation, we maintain our earnings estimates and TP.

However, we would caution investors to look out for key risks that include any major fluctuations in the RUB, Ukranian Hryvnia (UAH) or Kazakhstani Tenge (KZT). Investors should also be alert on potential impairments from Food Empire’s associate, Caffé Bene, if it continues to underperform.

Full RHB Research report here.

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