UOB Kay Hian analysts John Cheong and Clement Ho have maintained “buy” on Food Empire, as they both “expect another year of record earnings” for the company.
On that, the analysts have also upped Food Empire’s target price by 37% to $1.30 from 95 cents previously, on the company’s “compelling valuation”.
“While the share price has increased 22% since we raised our target price on Jan 18, we see room for upside as valuation remains attractive at 12 times FY2021 price-to-earnings (P/E) vs peers’ average of 25 times,” they write in a report dated Feb 9.
Due to the company’s “resilient” core earnings, and leading position in its core markets in Eastern Europe, as well as growing presence in Vietnam, its second-largest market, Cheong and Ho believe the valuation between Food Empire and its peers will narrow.
Given the stock’s lower valuation, Cheong and Ho believe there is a possibility of a takeover offer or privatisation of the company.
“In addition, in the past, SGX-listed peers including Super Group and Viz Branz were acquired and privatised at significantly higher valuations of 30.0 times and 16.4 times respectively,” they note.
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“We raise our target price to $1.30 on a higher valuation multiple of 16.6 times FY2021 P/E, or 1 standard deviation above its historical average mean P/E, as we opine the group deserves to trade at a higher valuation,” they add.
The analysts also expect “another record year for core earnings, underpinned by an improvement in margins”.
Despite the lockdowns in Food Empire’s core markets, Cheong and Ho see the company’s lower revenue being offset by better margins due to hikes in its average selling prices (ASPs) and cost management.
“As such, our forecast incorporates 10.2% y-o-y growth in core earnings to US$28 million ($37.1 million) for 2020, the group’s highest level of core net profit (excluding forex loss) since its listing,” they say.
Cheong and Ho have also maintained their net profit forecasts for 2021 and 2022 at US$31 million and US$33 million respectively.
SEE:Food Empire reports 13.3% drop in 1Q2020 earnings to $9.3 mil
The company has yet to announce its results for 4QFY2020, but the analysts believe that investors can expect a “strong set a results” due to the company’s “aggressive” buybacks.
The company has bought 3.3 million shares or 0.6% of its share base since the beginning of the buyback mandate on April 23, 2020.
“This was mainly carried out in 4QFY2020 to January [this year] when Food Empire Holdings bought back around 3 million shares for around $2 million, potentially signalling a strong set of results for 4QFY2020 and confidence in its business outlook in 2021,” they write.
Shares in Food Empire closed 1.5 cents higher or 1.6% up at 96 cents on Feb 15.
