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Analysts show concern on Food Empire's margins in FY2024 and beyond

Samantha Chiew
Samantha Chiew • 5 min read
Analysts show concern on Food Empire's margins in FY2024 and beyond
Higher coffee prices are putting pressure on Food Empire's margins. Photo: Albert Chua/ The Edge Singapore
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Analysts are generally positive on coffee maker Food Empire follow its latest business update.

Food Empire on May 9 reported its 1QFY2024 ended March business update. Its revenue for the first quarter came in 14.5% y-o-y higher at US$117.5 million, up from US$102.6 million.

Sales booked in Russia, its single largest market, was weighed down by unfavourable forex movements, as the ruble depreciated against the reporting currency US dollar. However, in constant local currency terms, revenue increased by 27.4% in this market instead.

Food Empire enjoyed strong growth too in other key markets such as southeast Asia and South Asia, up 35.3% and 33% respectively.

In its update, the group shares that protracted geopolitical tensions and macroeconomic environment have brought different kinds of challenges across global markets. The Group is closely monitoring their potential impact on its business. Nevertheless, Food Empire is cautiously optimistic about the outlook of its core markets as consumer response to marketing and promotional activities continues to be encouraging and sales remains robust.

See more: Food Empire reports 14.5% y-o-y jump in 1QFY2024 revenue

See also: UOB Kay Hian sees Civmec's bid to shift domicile to Australia a positive move

Following the results announcement, Maybank Research is keeping its “buy” recommendation on Food Empire with a target price of $1.30.

Despite the revenue growth in the first quarter, analysts Jarick Seet and Eric Ong believe that the rise in coffee bean prices and the initial operational cost of Food Empire’s new non-dairy creamer plant will hurt its margins this year.

“Hitting a good utilisation level and raising prices will take time before it benefits its P&L (profit & loss statement),” say the analysts, expecting about six months for the group to see financial impact from gradually raising prices. Hence, they believe that FY2024 earnings will likely suffer due to lower overall margins ahead of recovery in FY2025.

See also: UOBKH keeps ‘buy’ and TP unchanged on BRC Asia, sees bullish medium-term outlook

Management has shown its execution prowess many times in the past and the analysts believe this will likely just be a short-term blip for earnings.

“However, we believe the company’s valuations remain undemanding and management’s track record of execution has been good,” they say. They also believe that the stock is undervalued at 8.6x FY2024 P/E and the company’s share buyback will likely continue. Management will likely also continue to reward shareholders with attractive dividends which are currently yielding around 7%.

Meanwhile, CGS International has kept its “add” call but with a lower target price of $1.73 from $1.84 previously.

The first quarter results were in line with analyst William Tng’s expectation.

According to management, in Malaysia, the group completed the expansion of its non-dairy creamer production facilities and commenced commercial production from the added capacity on April 1. Management expects the increased capacity to contribute to revenue from 2QFY2024 onwards and the group expects the added capacity to reach full utilisation over the next two to three years.

Food Empire has also started construction of an additional snack factory located next to its existing one in Malaysia. When completed and commissioned, management expects to increase production capacity for its snack business from FY2025 onwards.

Tng is also cautious of the margin pressures the group is facing in FY2024 given the high coffee prices. The group mentioned that it will review its pricing strategy and adjust product prices to mitigate the higher raw material costs, but this could take months before it is reflected in its financials. Hence, Tng has lowered his gross profit margins and EPS forecasts.

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Overall, Tng likes the stock for its potential to grow its operations in Vietnam into a new major revenue contributor; its potential to grow its food ingredients business; and the end of its current major capex cycle in FY2023, allowing Food Empire to improve its dividends.

On the other hand, UOB Kay Hian is keeping its “buy” call, while lowering its target price to $1.30 from $1.69 previously. Analysts John Cheong and Heidi Mo too share similar sentiments and are concerned about the impact on margins from the high coffee bean prices. They have cut FY2024-FY2026 gross profit margin forecasts as a result.

However, consumer demand remains strong. “With the strong levels of demand sustained amid inflationary pressures and currency volatility from geopolitical uncertainties, our forecast incorporates a 6%-7% increase in FY2024-FY2026 revenue,” say Cheong and Mo.

“While rising coffee bean prices are likely to impact margins moving forward, Food Empire continues to record revenue growth during the period, illustrating its strong brand equity. We therefore still like Food Empire for its growth prospects,” say the analysts.

KGI Securities too has an "outperform" call on Food Empire but with a lower target price of $1.35 from $1.65 previously, due to upward cost pressure and foreign exchange losses. "While demand remains robust for the group’s products, the group continues to face headwinds such as higher coffee prices and a strong US dollar," says analyst Tang Kai Jie. 

Nonetheless, the analyst is upbeat on Food Empire's outlook as he anticipates demand to remain healthy across key markets and the company will enjoy continued growth in 2024. The company’s expansion plans are also expected to drive more sales. A weaker US dollar after the rate cut begins is also likely to support the company’s reported earnings.

The company also maintains a strong cash position, showcasing its ability to generate cash flow to fund its future expansions and conduct share buybacks. Its robust supply chain and market presence across several markets also give it a competitive advantage over its peers.

As at 3.20pm, shares in Food Empire are trading at $1.12.


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