Excerpts from Lim & Tan Securities report

We upgrade our forecasts and target price for Food Empire Holdings / FEH ($0.62, down 0.005) to S$0.72 based on 11.0x P/E in light of their better-than-expected 1H20 results, implying an upside potential of 16%.

Food Empire

Share price: 
61.5 c

75 c

FEH’s share price has risen over 20% since our initiation report 3 months ago and we continue to like the defensive and staple-like nature of its products which has proven resilient even during the deep global recession in 1H2020.

Thus, we maintain our “Accumulate” rating.

Demand for FEH’s products has been even more resilient than management’s earlier expectations given the defensive nature of their products.

This has led to FEH’s 3-in-1 instant coffee being 
more defensive even during Great Lockdown in 1H2020.

As a result, for 
FY20F, we revise our NPAT to US$24.6 mln, representing a marginal 6% yoy decline.

Given FEH’s robust balance sheet with a low net gearing position 
of 2.4%, we think that they will likely propose to keep dividends similar to last year.

Therefore, we assume a dividend pay-out of 2.0 S-cents, 
representing a forward dividend yield of 3.3% at the current share price of S$0.615.

At the current price of S$0.615, FEH trades at 9.4x P/E, which is cheap when compared to the peer average of 15.6x.

We think that the resilience and 
convenience of instant coffee has helped FEH weather through the global recession and remain upbeat about the prospects of FEH in 2H20.

concur with management’s view that any possible future lockdowns will not be as serious as that of the first global lockdown and that a recovery in 2H20 is imminent. As supply chains and business operations begin to normalize in 2H20, business momentum should gradually return to pre-COVID levels.

However, due to the continued uncertainty of COVID-19, 
we believe a stronger re-rating would occur once there is better visibility with the easing of travel measures as well as the return of business and consumer confidence within the global economy.

1H20 revenue decreased by 4.0% YoY to US$132.9mln while gross profit fell by 1.9% YoY to US$53.0mln. This was mainly due to lower sales from FEH’s Russia and South Asia markets due to COVID-19, along with the closure of their Myanmar market as of end 2019.

CafePho street120

"However, this was 
mitigated by higher revenue from their Kazakhstan and Vietnam markets due to increased selling prices and sales volumes.

"This affirms our view on 
Vietnam being one of FEH’s next leg of growth along with the resilience of instant coffee in spite of the disruptions caused by COVID-19."

-- Lim & Tan Securities report

We also like that FEH undertakes stringent cost reduction measures where necessary and this resulted in a noticeable 10.5% decrease in SG&A expenses YoY for 1H20, allowing them to eke out a YoY increase of 1.1% in NPAT despite the fall in revenue and gross profit.

In 2Q2020, the 
RUB/USD recovered from its lows recorded in March 2020 due to firmer crude oil prices brought about by the settlement of a dispute between
Russia and the OPEC.

FEH experienced some foreign exchange gain for the 
Group for 2Q2020 partially off seƫting the foreign exchange loss recorded in 1Q2020.

According to management, they have not noted any negative 
changes in consumption patterns for their products. Revenues for Russia and Vietnam appear to be bouncing back post-lockdown.

For the months 
of July and August, based on preliminary figures, 90% of pre-COVID sales may be possible.

At 62 cents, FEH is capitalized at $333mln. Forward PE is 10x while dividend yield is 3.2%.

Our target price is 72 cents, while Bloomberg consensus is 
more bullish at 80 cents.

We maintain an Accumulate rating, unchanged 
from our initiation report issued on 27 May’20.

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