RHB Group Research is reiterating its “buy” call on Food Empire with a lower target price of $1.01 from $1.13 previously, to factor in lower earnings because of rising costs.
According to analyst Jarick Seet, Food Empire reported healthy revenue growth of 15.1% y-o-y for 3QFY2021, but was hit by high commodity costs and record-high freight rates. “We believe that this issue is temporary, and will likely persist until the end of 1QFY2022,” he says.
To offset higher costs, Food Empire aims to raise its average selling price in several stages but Seet is still expecting a reduction in earnings, and thereby, his updated target price.
Food Empire’s 3QFY2021 gross margin dropped to 25.7%, from 37.7% in 3QFY2020, but Seet expects margins to normalise by 1HFY22, and profitability to rebound strongly in FY2022.
“This is because freight and commodity costs should normalise once the Covid-19 situation improves around the globe – governments around the world are already implementing measures to regard Covid-19 as an endemic,” says Seet.
He also notes that Food Empire has been enjoying robust revenue growth by historical standards. In 3QFY2021, it was up 8.8% y-o-y, with its core market of Russia up by 15.1% y-o-y.
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The company’s management is also optimistic on the longer term, as it has been actively buying back its shares. “We believe that this is a vote of confidence by management on the company’s prospects,” adds Seet.
“We remain confident on Food Empire’s prospects, and believe that it remains an attractive target for privatisation or a takeover, due to its attractive valuation,” he says.
As at 1.30pm, shares in Food Empire are trading at 76 cents or 17.5 times FY2021 earnings with a dividend yield of 1.5%.
Photo: The Edge Singapore/ Albert Chua
