SINGAPORE (June 9): The Russian RUB has appreciated some 15% against the USD over the last two months amid oil price improvements and RHB Group Research analyst Juliana Cai believes that this a positive for instant coffee manufacturer and distributor Food Empire.
The Russia market contributes to about 40% of the company’s revenue.
Cai has kept her “buy” recommendation on Food Empire with a target price of 75 cents.
Furthermore, given that Food Empire’s sales of goods are denominated in local currencies, while the bulk of raw materials are priced in USD, the strengthening of the Commonwealth of Independent States (CIS) currencies should help reduce gross margin erosion in 2Q20.
The UAH and KZT have also appreciated in tandem with the RUB.
Although the improving RUB should help support the company’s gross margins and minimise foreign exchange losses, the analyst still expects 2Q20 results to be soft due to the introduction of the non-working period in Russia from end March to mid-May, with only essential services opened. The Moscow and Saint Petersburg regions extended their lockdowns to 31 May.
Unemployment rose 26% m-o-m in April, with the unemployment rate reaching a high of 5.8%.
The company’s management earlier said Russia’s sales were negatively impacted in April due to lower footfalls at retail stores.
“We believe sales for May will also remain soft before picking up in June – in line with the gradual resumption of economic activities. We expect the same for Ukraine and Kazakhstan, as these two countries also began to gradually ease their restriction measures,” says Cai
“We expect business to start picking up in June with the relaxing of the lockdown measures,” she adds.
Meanwhile, the company’s main product – 3-in-1 instant coffee mix – is a relatively staple product, and Food Empire has a strong market share in this segment in its key CIS markets, hence Cai expects sales to improve in 2H20 as Covid-19 fears dampen. The group also implemented about 10% price hike for some of its key markets. The impact of this prince increase should be reflected from 3Q20 onwards.
As at 11.25am, shares in Food Empire are trading at 56 cents or 0.9 times FY20 book with a dividend yield of 2.9%.
