FOOD EMPIRE: Forget media headlines, what's the real deal about 3Q results?

A Singapore newspaper's headline read: "Food Empire Q3 net profit falls 30.6% to US$15.7 million". Another publication: "Food Empire posts earnings of US$15.7 mil for 3QFY2023, down 30.6%". CEO Sudeep NairThose headlines are a killjoy for investors as the company actually delivered excellent 3Q operating results. That's right, excellent. This is how Food Empire headlined its press release: "Food Empire delivered another record revenue and operating profit for 9M2023". While the media articles did state the exceptional items that led to the so-called y-o-y profit decline, the headline writers failed to comprehend that their headlines were conveying a totally wrong story. So how's the real way of seeing Food Empire's performance? Check out the graphic below. The 3Q profit was way above consensus forecast on a y-o-y basis, excluding the 3Q2022 one-off gain from a property sale.

Thus, in 3Q this year, the net profit of US$15.7 million was lower than the US$22.6 million in 3Q2022 only because 3Q2022 was boosted by a one-off US$15 gain recognised on the sale of the building.

Sequentially, this is how the net profit this year rose:

Accordingly, the market -- ie participants handling real money who have read beyond headlines -- has re-rated the stock, sending it up from $1.07 (before the results release) to as high as $1.17 over the following two days.

Analysts have also positively written about the 3Q performance and the near-term outlook, and their target prices suggest strong upside for the stock.
 

"Reiterate our Add call with an unchanged TP of S$1.69"   "Our Add rating is premised on: a) the potential to grow Vietnam as a new major revenue contributor, b) the potential to grow its food ingredients business, and c) the end of the capex cycle, allowing FEH to return excess cash to shareholders." -- CGS-CIMB analyst William Tng, CFA

"Exceeded expectations"  Food Empire Holdings’ 3Q23 core earnings of US$15.7m (+107% yoy) exceeded our expectations, with 9M23 forming 84.6% of our full-year estimate. Excluding a one-off gain of US$15m on the disposal of a non-core asset in 3Q22, 3Q23 earnings recorded a substantial 106.6% yoy and 22.7% qoq growth. The record-high 9M23 revenue of US$305.1m (+6.7% yoy) was mainly driven by higher volumes and/or higher ASPs across FEH’s core business segments. Gross margin also improved 5.3ppt yoy to 34.3% as a result of a favourable sales mix of products with higher margins. -- UOB Kay Hian analyst John Cheong

"Profit way above consensus"  "Despite a depreciating Ruble, Food Empire reported a solid 3Q23 result with NPAT at USD15.7m, way above consensus and our estimates due to strong demand from its core markets in the CIS and Southeast Asia. "We expect demand to remain strong and margins to improve in FY24 as FEH raised prices by 8% during Sep 2023 to counter the Ruble’s depreciation. As a result, we raise our FY23E NPAT by 10.8% and lift FY24E by 10.5%." -- Maybank KE analyst Jarick Seet

Food Empire participated in Anuga, a leading F&B trade fair in Cologne, Germany in Oct 2023. Photo: Company/Facebook

Beyond its profitability, one striking thing about Food Empire is its growing cash pile (cash and cash equivalents: US$115.6 million, or S$157 million).

This has arisen from, more recently, the asset sale, and the tapering off of capex for manufacturing facilities.

Capex in past years in Malaysia and India have set the company up for strong recurring cashflow, and the mangement has indicated that there's no significant capex on the horizon.

What this means is Food Empire can step up its dividends to shareholders.

At last year's rate of 4.4 cents/share, the cash payout amounts to an affordable S$24 million.

CGS-CIMB's William Tng says: "Given the completion of major capex requirements... we conservatively assume that Food Empire will continue with the trend of dividend per share of 4.40 Scts which it declared for FY22.

"Food Empire does not have an official dividend policy and special dividends could be a venue to return excess cash to shareholders if the company does not come across any attractive M&A opportunities."

Food Empire’s spray dry and freeze dry coffee plants in India now operate at full capacity.


For more, see
» Maybank report here
» UOB KH report here
» CIMB report here.