RHB Group Research analyst Jarick Seet has kept “buy” on Food Empire with the same target price of $1.27 after Food Empire reported its 1QFY2021 figures on May 11.

See: Food Empire reports earnings of US$6.8 mil for 1QFY21

For the quarter ended March, earnings increased by 3.9% y-o-y to US$6.8 million ($9.1 million) while revenue grew 3.4% y-o-y to US$76.8 million.

The better performance comes despite a record 1QFY2020 and amid lower margins due to higher freight and raw material costs during the period.

However, Seet says he expects Food Empire’s margins “to improve and revenue to grow further in the quarters ahead, as it was impacted by global lockdowns in 2QFY2020-3QFY2020. Management can also widen margins by its raising ASPs, if needed,” he writes in a May 14 report.

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To him, he expects demand to remain resilient and grow in the FY2021, especially in the second and third quarters, as the company has since learnt to solve previous operational and logistics issues that led to a temporary decrease in its sales volume.

To this end, Seet says the 1QFY2021 is likely to be Food Empire’s weakest quarter for the year, even though it yielded numbers that outperformed his estimates.

“Going forward, management said that marketing and administrative costs are likely to remain low this year, even though revenue should rebound further, thereby allowing for margin expansion,” he says.

With the increase in freight and raw material costs in the 1QFY2021, Seet notes that the company’s management has implemented measures such as further cost reductions and a targeted marketing strategy to stem the growth of these metrics.

“Food Empire is confident on charting higher revenue growth this year, on the back of strong demand for its products – even in new markets like Vietnam and Southeast Asia,” he says.

“It is also reviewing the option of increasing average selling prices (ASPs) in strong markets like Russia and Ukraine, and will raise prices from 3QFY2021 onwards if necessary, or if competitors hike up their own selling prices,” he adds. “Management expects freight and raw material prices to stabilise towards the end of 3QFY2021, which should further strengthen margins.”

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Looking ahead, Seet remains “positive” on the counter, as he sees the potential for the company to grow further.

For instance, he is not ruling out the possibility of privatisation given its undervalued position.

“Management has also been aggressively buying back shares, with the last exercise executed at 94 cents per unit,” he says.

“We believe the share buybacks were done to support its stock price,” he adds.

With a market valuation of 10 times FY2021 price-to-earnings (P/E), Seet says Food Empire is among the cheapest consumer staples counters with a proven track record, compared to its peers that are trading at 20 to 30 times P/E.

As at 12.28pm, shares in Food Empire are trading 2 cents higher or 2.4% up at 86 cents, or 1.4 times P/B, according to RHB’s estimates.