Excerpts from UOB KH report

Analysts: John Cheong & Clement Ho

Food Empire Holdings (FEH SP)

3Q21: Below Expectations Due To Costs; Price Increases Will Improve Earnings

3Q21 net profit of US$3m (-51% yoy / -22% qoq) was below expectation, 9M21 formed 57% of our full-year estimates.

Food Empire

Share price: 
79.5 c

Target: 
$1.30

Margin is still under pressure due to high commodities prices and ocean freight rates.

We believe earnings should improve via price increases and normalisation of costs.

All markets except Southeast Asia recorded sales growth, with double-digit growth in the largest market, Russia. This continues to reflect the strong brand strength of FEH.

Maintain BUY and target price of S$1.30.


maccoffee variants

RESULTS
Results below expectations due to higher costs which led to margin pressure. Food Empire Holdings’s (FEH) 3Q21 net profit of US$3.1m (-51% yoy / -22% qoq) was below expectation, with 9M21 forming 57% of our full-year estimates.

The miss was mainly due to lower margin as a result of higher commodities prices, record-high ocean freight rates, coupled with a shortage of shipping container slots resulting in supply chain delays and higher depreciation expenses arising from the commencement of the group’s new freeze dry coffee plant in India. Gross margin fell 4.9ppt to 25.7%.

Revenue growth across all markets, except Southeast Asia due to a temporary lockdown. Revenue for 3Q21 grew 8.8% yoy mainly driven by Russia and South-Asia market. The largest market, Russia, reported encouraging revenue growth of 15.1%, while the second largest market, Southeast Asia recorded a 5.3% decline in revenue due to a temporary lockdown in Vietnam.

The third largest market which consists of Ukraine, Kazakhstan and Commonwealth of Independent States (CIS) also recorded a 5.3% yoy revenue growth.

Expect cost pressures to be overcome via price increases and normalisation of costs. Given the strong brand strength and leading market position of FEH, it will be able to gradually pass on the increased costs of raw materials and logistics via price hikes.

In addition, we believe the spike in raw material and logistics costs will ease as COVID-19 disruptions are reduced with higher vaccination rate across the world.

STOCK IMPACT
Growing revenue. With the gradual reopening of economies on the back of global efforts to increase vaccine adoption rate, our forecast incorporates a 9.4% increase in revenue.

Furthermore, FEH’s increasing scale in Vietnam, efforts to streamline its operations, exit of its loss-making Myanmar business and ability to raise ASP during core market currency weakness have improved its overall margins over the years, while maintaining stable revenue. We expect stable net margin going forward after 2021.

Resilient product offerings and strong brand equity. Despite challenges in 2020 including currency devaluation in core markets and national lockdowns, the group has managed to generate a record level of profits.

We believe this is a testament to its strong brand equity and experience in navigating volatile currencies. Furthermore, given the low price point and consumer-staple nature of its products, the products are relatively price inelastic. As such, sales volumes are more sheltered from an economic slowdown, in our view.

Compelling valuation; potential takeover target. FEH currently trades at 10x 2022F PE vs peers’ average of 18x. In view of its resilient core earnings amid a challenging environment, leading position in its core markets in Eastern Europe and growing presence in its second largest market, Vietnam, we believe the valuation gap with its peers will narrow.

Furthermore, given the depressed valuation, we do not rule out a possibility of a takeover offer or privatisation. Besides, in the past, SGX-listed peers including Super Group and Viz Branz were acquired and privatised at significantly higher valuations of 30.0x and 16.4x respectively.


EARNINGS REVISION/RISK
We reduced our 2021 earnings by 27% as we reduce the gross margin forecasts by 2.7ppt to 33.4%. This is to account for the higher raw material costs and logistics costs as a result of COVID-19 disruption. However, we believe this situation will be addressed with price hikes and normalisation of costs. Hence, we kept our 2022 and 2023 earnings estimates unchanged.

VALUATION/RECOMMENDATION
• Maintain BUY with an unchanged PE-based target price of S$1.30, based on 16.6x 2022 PE, or 1SD above its long-term historical average (excluding outliers).


Full report here.


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