Excerpts from RHB report
Analyst: Juliana Cai
| Keep BUY and SGD0.75 TP, 25% upside with c.3% yield. Food Empire has been performing share buy-backs in recent weeks.
Given that the group is poised to deliver earnings recovery in 3Q on reopening economies and ASP increases, we believe the current share price offers a good entry opportunity for investors looking to capture potential upsides.
Earnings to recover from 2Q20’s low, driven by higher sales. Sales in FEH’s biggest market – Russia – should pick up in 3Q, as sales volumes improve amid the easing of national lockdowns.
The group has also implemented ASP increases across 2Q-3Q, which should help mitigate some of the negative impacts from the RUB’s depreciation.
While Russia has seen a spike in new COVID-19 cases since end September, we note that the Russian Government does not plan to re-impose national lockdowns.
Without a severe disruption, we expect FEH’s sales to remain resilient in 4Q.
In Vietnam – the group’s second-largest market – there was some resurgence in COVID-19 cases during the July-August period.
Fortunately, the contagion was confined around the Da Nang area and a partial lockdown was implemented for the region.
We understand from management that this should not have a major impact on its sales in Vietnam.
Tighter cost controls. FEH’s G&A costs have reduced by USD2m (10% YoY) in 1H20.
We expect such costs to remain low in 2H20 on the group’s cost-containment initiatives and lower travelling costs amidst border restrictions.
Key risk lies in FX. The RUB has depreciated c.10% across 3Q20. We project a FX loss of c.USD3m in 3Q20 – similar to 1Q20’s amount.
That said, our forecasts remain unchanged, as we believe this could be offset by the recovery in sales.
However, a further depreciation of the RUB from current levels could affect 4Q and FY21’s projections.
| The group has been doing share buy-backs at the current price of c.SGD0.60. We believe this signals management’s confidence for 2H20.
At this price level, we concur that the valuations of c.10x and 8.4x for FY20F and FY21F P/Es are very attractive for a consumer staples group that should generate stable earnings despite these challenging times.
We maintain our BUY call and SGD0.75 TP. Key risks: Negative movements in the RUB and other Commonwealth of Independent States’ (CIS) currencies and rising coffee bean prices.
Full report here.