Analysts from UOB Kay Hian have reiterated their “buy” call for Food Empire F03 with a 64% increased target price of $1.28 from 78 cents previously, after the company posted earnings of US$33.0 million ($44.6 million) for the 2HFY2022 ended Dec 31, 2022, 4.2 times higher than its earnings of US$8.0 million for the year earlier period.
Maybank Securities analysts have also maintained their “buy” rating with a higher target price of $1.29 from $1.20 previously.
In their report dated March 1, John Cheong and Heidi Mo of UOB Kay Hian note that Food Empire reported net profit of US$60.1 million for 2022, pulling off a new record high. Excluding a one-off gain of US$15 million from the disposal of non-core assets, the company’s core net profit increased 133.7% y-o-y to US$45.1 million, outperforming their expectations and forming 125% of the analysts’ estimates.
The group has thus proposed a record first and final dividend of 4.4 cents per share for FY2022, double that of FY2021’s dividend payout of 2.2 cents per share, which translates to a dividend yield of 5.5%.
They have attributed Food Empire’s strong performance to cost controls, higher revenue and improved profitability from most segments, which mitigated lower sales from the Southeast Asia market. “Its largest market, Russia, reported revenue growth of 29.1% to $148.4 million, mainly due to strong consumer demand, the appreciation of the Russian ruble against the US dollar, and higher average selling price (ASP),” say Cheong and Mo.
“Similarly, despite fluctuating currencies from geopolitical uncertainties, its Ukraine, Kazakhstan and Commonwealth of Independent States (CIS) segments achieved a 28.6% y-o-y revenue growth,” they add.
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However, the analysts note that revenue from the Southeast Asia segment fell 4.2% to US$92.7 million, attributable to post-pandemic normalisation in Vietnam, but partially offset by improved contributions from Malaysia’s non-dairy creamer and snacks manufacturing facilities.
In FY2022, selling and marketing expenses fell by 17.2% y-o-y due to lower advertising and promotion expenses, but were partially offset by higher manpower costs, as seen by the 11.6% y-o-y increase in administrative expenses. With that, core net profit margin expanded a “substantial” 5.3 percentage points to 11.3% in 2022, indicating the group’s successful cost-control measures and optimised operations, they say. “In our view, the results are a testament to the group’s strong brand equity, and earnings growth will continue as demand in all markets remains strong.”
The UOB Kay Hian analysts have raised their FY2023 and FY2024 core earnings forecasts by 33% and 41% respectively to $48 million and $52 million, up from $36 million and $33 million, while adding their estimates for FY2025. “These figures reflect the better-than-expected core earnings for FY2022 and improving net margins,” they say.
Their price-to-earnings ratio (P/E) based target price has been raised by 64% to $1.28 as their P/E peg has increased to 10.5x FY2023 earnings per share (EPS) — Food Empire’s long-term historical mean — to reflect the improved outlook given sustained strong consumer demand. The analysts had previously valued the company at 8.4x FY2023 EPS, 1 standard deviation (s.d.) below its long-term historical average.
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Jarick Seet and Eric Ong of Maybank concur, and say that there is “more to come” for Food Empire after its record year, which “blew past” theirs and consensus estimates. They expect dividends to “at least maintain or grow” as performance continues to improve.
“Food Empire has also been undertaking share-buybacks in the open market and we expect that to continue as management concur that the company is deeply undervalued,” add the Maybank analysts.
They have lifted their FY2023 and FY2024 forecasted patmi by 8.9% and 13.9% respectively, to account for the expected higher revenue growth. Their increased target price of $1.29 from $1.20 previously is based on an 11x FY2023 P/E.
“Food Empire is currently trading at 6.9x core FY2023 P/E, a steep discount versus both its private and listed valuations of global peers. As such, we think that it could be an attractive target for bigger competitors given its strong presence in Russia and Vietnam,” explain Seet and Ong.
Their rerating catalysts include the end of the war in Ukraine, continued strong growth in other markets and revenue diversification away from Russia, an attractive takeover target by bigger F&B players or private equity funds. Meanwhile, downside risks include an escalation of Russia’s aggression in Ukraine, as higher raw material prices and Ruble depreciation would be negative for Food Empire’s earnings.
As at 11.02am, shares in Food Empire were trading 3 cents or 3.59% up at 86.5 cents with a dividend yield of 5.61%.
