The Covid-19 pandemic is slowly improving in some countries, with lockdown measures easing and market activities resuming. This is apparent in coffee products manufacturer and distributor Food Empire’s core markets in Russia and Ukraine.
This means an improvement in mobility trends at shops and the recovery in retail sales.
With that, UOB Kay Hian is remaining positive on Food Empire’s outlook and is keeping a “buy” recommendation on the stock with a target price of 85 cents.
To recap, in its latest 2Q20 results, the group’s revenue from Russia fell by 20% y-o-y, due to stay-at-home measures implemented at end-March. For most regions, footfall at shops plummeted as residences were confined to their homes, and food purchases were only allowed at shops closest to their place of residence.
But since June, Russia has been gradually easing restrictions and a three-stage reopening plan was announced by the federal government, with regional governors ultimately deciding how and when to proceed. With that, there has been an improvement in mobility trend at places such as grocery markets and specialty food shops. Ukraine has also seen similar patterns with restrictions being eased.
With the reopening of retail businesses in most regions, retail food sales in Russia rebounded with the pace of decline narrowing to -2.2% y-o-y in July, while retail turnover in Ukraine bounced back in July, registering a y-o-y growth of 7.8% for the first month since April.
This mirrors management’s guidance in 2Q20 of sales slowly reverting to pre-Covid-19 levels.
In a September 24 report, analyst Joohijit Kaur says, “We are encouraged by the sequential recovery in these markets and our forecast accounts for a moderate 5.1% y-o-y decline in core earnings in 2H20 compared with -24% y-o-y (excluding forex gain) in 2Q20.”
Furthermore, the group has managed to mitigate the impact of the volatile Russian Rouble by implementing a an average selling price (ASP) hike in April. With the price hike being carried out in stages, the analyst reckons that this will only be more apparent in the group’s 3Q20 results as compared to 2Q20.
Additionally, the group has also managed to contain cost, with admin expense being reduced by US$2 million in 2Q20, forming 13.2% of sales compared to 14.2% in 2Q19.
“Given the consumer staple nature of its products, low price point and its market leading position, demand for its products is relatively price inelastic and is fairly resilient in the face of an economic slowdown, in our view,” says Kaur.
Meanwhile in Vietnam, the group’s second largest and fast growing market, sales have been impacted less by the pandemic and have performed well.
While the group does not separately disclose Vietnam’s sales, the group’s Southeast Asia market (which includes businesses in Vietnam and Malaysia) registered a growth of 9.0% y-o-y in 2Q19, driven by the growth in sales volume in Vietnam.
“Although there was a slight resurgence in cases in early August, movement restrictions were mostly limited to affected provinces. As such, we do not expect it to have a major impact on the group’s operations and sales,” says Kaur.
Overall, the stock is trading at an attractive valuation of 8.6 times FY21 PE, a significant discount to peer average of 20 times FY21 PE despite its market leader position in its core markets in Eastern Europe and growing presence in Vietnam.
As at 12.50pm, shares in Food Empire are trading at 60 cents, or 1.0 times FY20 book with a dividend yield of 1.7%.
