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RHB places Food Empire 'under review' on uncertainties arising from Russia-Ukraine conflict

Felicia Tan
Felicia Tan • 3 min read
RHB places Food Empire 'under review' on uncertainties arising from Russia-Ukraine conflict
As at 11.14am, shares in Food Empire are trading 6 cents lower or 10.3% down at 52 cents, representing a 52-week low.
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RHB Group Research analyst Jarick Seet has placed Food Empire “under review” from “buy” as he awaits more clarity on the company’s prospects.

He has also lowered his target price to 93 cents from $1.01 previously.

Russia’s invasion of Ukraine on Feb 24 has created “all sorts of uncertainties that may result in complications for Food Empire,” writes Seet in his report dated Feb 28.

“Some of the direct implications could be the depreciation of the Russian rouble (RUB) - which may impact the company’s margins - as well as potential issues in moving money in and out of Russia due to sanctions - which could remove the country from the SWIFT banking system. As a result, we prefer to wait for a bit more clarity on this geopolitical situation,” he notes.

Should Russia be fully removed from the SWIFT banking system, Food Empire’s cash in the country may be harder to access, which will create difficulties for the company.

Russia, Ukraine and other former Soviet states contribute around 57% of Food Empire's revenue in 2HFY2021.

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See: Food Empire reports lower 2HFY2021 earnings, warns of higher costs with Russia-Ukraine conflict

In the 4QFY2021 ended December, the company recorded strong q-o-q revenue growth of 23.7% to US$94.5 million ($127.8 million). Gross profit margin (GPM) during the quarter rose 1.9 percentage points q-o-q to 27.6%.

Net profit for the 4QFY2021 rose 54.7% q-o-q to US$4.78 million on the back of improved margins.

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“Going forward, freight rates should continue to gradually be lowered which would be beneficial for the company’s gross margins,” says Seet.

“In addition, we expect management to continue raising prices in phases for certain products. In terms of revenue growth, Food Empire enjoyed a 17.5% y-o-y growth to US$320.6 million as each of its key markets registered growth although in a challenging operating environment. If not for the inflationary pressure on commodity and freight coupled with supply chain disruptions, Food Empire would have enjoyed a great FY2021,” he continues.

While the current raft of sanctions are unlikely to impact the company at the moment, any further potentially deeper sanctions may have an impact on Food Empire after all.

That said, Seet notes that the company’s management “remains confident on the consumer demand for all of its markets, including those in Russia and Ukraine”, as the last conflict in the Crimean saw heightened demand in these markets.

As at 11.14am, shares in Food Empire are trading 6 cents lower or 10.3% down at 52 cents, representing a 52-week low.

Photo: Albert Chua/The Edge Singapore

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