RHB Group Research analyst Jarick Seet has kept his “buy” call for Food Empire Holdings with an unchanged target price of $1.27 as he sees stronger quarters ahead for the company.
“We believe that the worst is over for Food Empire in 2020, with 1Q2021 likely to be the weakest quarter for FY2021,” he says in a July 7 research note.
Seet’s sanguine outlook for Food Empire’s FY2021 ending December is underpinned by the "strong sequential improvement" the company has shown from 2Q2020 on the back of stable demand for instant coffee products. “We expect demand to remain resilient, and increase in FY2021, especially in 2Q-3Q2021,” Seet says.
See also: 'Buy' Food Empire on potential increase in ASPs, possibility of privatisation: RHB
Given the low revenue base in 2020 due to the lockdowns, Seet expects Food Empire to report strong revenue growth in the coming quarters.
He also anticipates margins to improve and contribute to higher earnings for the FY2021. “With the higher freight and raw material costs impacting margins in 1Q2021, management has taken several initiatives such as further cost reduction and a targeted marketing approach amid a series of measures to mitigate the increase from these areas,” he explains. Freight costs and raw material prices are also expected to stabilise toward the end of 3Q2021.
A further increase in average selling prices (ASPs) in Food Empire’s strong markets like Russia and Ukraine is also possible, Seet notes, based on management guidance. “The company will raise prices in 3Q2021, if deemed necessary or if competitors also raise prices,” he says.
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Seet believes that the increase of a long-term shareholder’s stake in Food Empire in May shows a vote of confidence in the company. Additionally, he notes that management has been on an "aggressive" share buyback streak. "We believe that management will likely continue its share buyback programme, providing further support to the stock," he says.
He keeps his “buy” call on the counter, noting that at 10 times FY2021 P/E, the group is among the cheapest consumer staples with a "proven track record", while its peers are trading between 20-30 times P/E. He also reiterates that privatisation may be a possibility, given its undervalued status.
As at 10.33am, shares in Food Empire are trading 0.5 cents or 0.57% lower at 87.5 cents.
