RHB Group Research is keeping its “buy” recommendation on Food Empire with a target price of 75 cents, as analyst Juliana Cai believes that the group is poised for earnings recovery I 3QFY2020 and its current share price of 60 cents offers a good entry opportunity for investors looking to capture potential upsides.
Furthermore, the group has been also performing share buy-backs in recent weeks, which signals management’s confidence for 2HFY2020 and that it deems the current valuation as cheap. At this price level, the analyst views the valuations of about 10 times and 8.4 times FY2020 and FY2021 P/Es “very attractive” for a consumer staples group that should generate stable earnings despite these challenging times.
See also: Food Empire's coffee empire is gradually strengthening as lockdown measures ease
“Sales in Food Empire’s biggest market – Russia – should pick up in 3QFY2020, as sales volumes improve amid the easing of national lockdowns,” says Cai, who also noted that the group has gradually increased its average selling price (ASP) from 2QFY2020 to 3QFY2020, which should help mitigate the depreciating RUB.
“While Russia has seen a spike in new Covid-19 cases since end September, we note that the Russian Government does not plan to re-impose national lockdowns. Without a severe disruption, we expect Food Empire’s sales to remain resilient in 4QFY2020,” adds Cai.
Meanwhile in Vietnam – the group’s second-largest market – there was some resurgence in Covid-19 cases during the July-August period. Fortunately, the contagion was confined around the Da Nang area and a partial lockdown was implemented for the region. The management has said that this should not have a major impact on its Vietnam sales.
To further mitigate uncertainties stemming from the Covid-19 pandemic, the group has implemented tighter cost controls, with general and administrative expenses reducing by 10% y-o-y or US$2 million ($2.7 million) in 1HFY2020.
“We expect such costs to remain low in 2HFY2020 on the group’s cost-containment initiatives and lower travelling costs amidst border restrictions,” says Cai.
As at 11.55am, shares in Food Empire are trading at 60 cents or 1.1 times FY20 book with a dividend yield of 2.5%.
