FOOD EMPIRE: Higher earnings and margins to come?

Food Empire is one of 13 stocks in UOB KH's alpha portfolio which has now beaten the STI in 13 out of the past 14 months. 

• Good entry point for a regional coffee mix player. John Cheong, analystTrading at 8x 2023F PE vs peers’ average of >13x, Food Empire’s (FEH) valuation is due for a re-rating, in our view. • Strong demand for consumer staple products. 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. FEH’s products in the coffee segment continue to be affordable with mass appeal, leading to stronger demand in 2022.

• We expect higher earnings and improved margins moving forward. 

2022 core earnings of US$45.1m (+134% yoy) outperformed our expectations.

Revenue grew 25% yoy mainly from both the Russia and Ukraine, Kazakhstan and Commonwealth of Independent States (CIS) markets, with each recording a 29% yoy increase on the back of strong demand and higher ASP despite currency volatilities.

Although revenue from the Southeast Asia segment fell 4% upon post-pandemic normalisation in Vietnam, the new capacity expansion of its non-dairy creamer facility is currently underway and expected to contribute in 4Q23.

Core net profit margin also expanded a substantial 5.3ppt to 11.3% in 2022, indicating the group’s successful cost-control measures and optimised operations. With further normalising of key costs, margins will likely improve in 2023.

• Maintain BUY. Our target price of S$1.28 is based on 10.5x 2023F EPS, or its long-term historical mean.

Full report here.