FOOD EMPIRE: Trading at 40-50% discount to peers

Excerpts from UOB KH report
Analysts: John Cheong & Heidi Mo

MacCoffee is the key brand of instant coffee for Food Empire in its No.1 market, Russia.

• Frequent share buybacks in 1Q23 at near 52-week high. Food Empire Holdings (FEH) has continued to buy back its shares in 1Q23 after releasing a strong set of results in Feb 23. In 1Q23, FEH has bought back close to 2m shares at S$0.65-0.90. This is close to the 52-week high share price of S$0.96.

• Strong core earnings growth in the last four consecutive quarters and doubling of dividend for 2022. FEH has reported strong core earnings growth momentum in the last four quarters, with more than 30% yoy growth (1Q22: +34% to US$9.2m, 2Q22: +280% to US$17.9m, 3Q22: +145% to US$7.5m, 4Q22: +119% to US$10.4m).

The growth was mainly driven by an increase in consumer demand for FEH’s products given their affordable price points, improving net margin from easing of supply chain issues and improvement in product mix.

In addition, FEH has declared a dividend of 4.4 S cents per share for 2022, double 2021’s dividend of 2.2 S cents per share.

• Positive development in the Russia-Ukraine conflict could lead to narrowing of valuation discount vs peers, which is at 40-50% currently. China’s president Xi Jinping recently visited Russia in Mar 23 for a three-day state visit.

Although there was no substantial resolution to the Russia-Ukraine conflict, China has continued to position itself as a peace broker by recommending solutions to the conflict as well as calling for a ceasefire and peace talks.

Russia’s leader has also been open to the ideas, highlighting that “many of the provisions” could be “taken as the basis” for a peaceful settlement in Ukraine, “when the West and Kyiv are ready for it”.

We believe positive developments in the conflict could lead to valuation re-rating for FEH as the valuation discount for FEH’s Russia business could narrow.

Currently, FEH’s 2023F PE of 8.3x is at around a 40% discount vs its local peers and at around a 50% discount vs its regional peers.

• Strong consumer demand across segments. Despite rising inflationary pressures and ASPs, FEH does not see major changes in consumption patterns.

Given the consumer staple nature of FEH’s products, demand is relatively price inelastic. For instance, the group’s products in the coffee segment continue to be affordable enough for mass appeal, leading to sustainable or even stronger demand in 2022.

Hence, we see that sales volumes are more sheltered from market volatilities. With supply chain disruptions easing in some markets, we forecast higher earnings and improved margins moving forward.

• Positive brand equity built. Despite challenges in 2022, including geopolitical tensions in its core markets and rising inflation, the group has managed to generate record-level profits.

Additionally, the group was once again recognised as the Top 100 “Most Valuable Singaporean Brands” by Brand Finance for the twelfth consecutive year, with its estimated brand value increasing 17% yoy to US$101m. We believe this is a testament to its strong brand equity.

• Growth in top-line and improved margins lift earnings. With the strong levels of demand sustained amid inflationary pressures and currency volatility due to geopolitical uncertainties, our forecast incorporates a 7%/7% increase in 2023/24 core earnings.

EARNINGS REVISION/RISK
• We maintain our earnings estimates.

Full report here.