SINGAPORE (Nov 22): RHB Research is upgrading F&B manufacturer Food Empire to “buy” given 3Q18 result came in above expectations.
RHB says diversification to other markets is reducing the group’s exposure to the weakening Russian rouble and having a positive impact on share price.
In a Monday report, RHB analyst Juliana Cai sees value emerging from the stock which should be able to maintain its profits given the group’s ability to manage gross margin and reduce forex losses.
Food Empire manufactures and sells 3-in-1 coffee, instant coffee, frozen finger foods and snacks in over 50 countries, including Russia, Central Asia, China, Indochina, the Middle East, Mongolia and the US.
In 3Q18, core PATMI came in at US$6.9 million while reported PATMI fell 20% y-o-y to US$5.9 million. But stripping out forex loses, PATMI would only be down 4% y-o-y.
Gross margin remained at 38.7%, despite the depreciation of the Russian rouble against the same period last year. In addition, forex losses were reduced to US$1.1 million from US$2.0 million in 2Q18.
According to management, the group saw lower commodity prices in the quarter. New product launches and price adjustments in Russia also helped to hold up the gross margin while improved capital management lowered forex losses.
3Q18 revenue grew 4% to US$72.9 million while revenue in Russia fell 8% y-o-y during the quarter. Lim says although the rouble depreciated 12%, the group still delivered a positive growth in local currency terms, thanks to diversification to other markets.
In Vietnam, it increased penetration of its key Café Pho product and also launched new products, leading to a 24% y-o-y increase in Indochina revenue.
However, sales growth in new markets came at a cost, as SG&A grew 27% y-o-y, largely on higher advertising and promotions.
Going into FY19-20F, Cai expects SG&A to remain high as the group continues to invest in new markets. With its new instant coffee plant expected to be completed in FY20, she also expects depreciation cost to increase. These higher costs should be partially offset by a higher revenue growth and gross margin.
“Upgrade to ‘buy’ with higher target price of 64 cents pegged to 13 times FY19F earnings, a 10% discount to peer average. We raise our FY18F/19F/20F core PATMI forecasts by 13%/10%/3% on the back of resilient gross margins,” says Cai.
Year to date, shares in Food Empire are down 21.7% to 54 cents.
