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'Huge bargain' Food Empire started at 'buy' by UOB Kay Hian

Stanislaus Jude Chan
Stanislaus Jude Chan • 3 min read
'Huge bargain' Food Empire started at 'buy' by UOB Kay Hian
Is it time to wake up and smell the instant coffee?
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SINGAPORE (Feb 5): UOB Kay Hian is initiating coverage on instant coffee manufacturer Food Empire Holdings with a “buy” recommendation and a target price of 89 cents – representing a potential upside of close to 35%.

“At current prices, the stock trades at an attractive valuation at 9.2 times 2020F price-to earnings (PE), significantly lower compared to peers’ average of 22 times,” says lead analyst Joohijit Kaur in a Feb 5 report, calling Food Empire a “huge bargain”.

Food Empire’s flagship brand, MacCoffee, is the leading 3-in-1 coffee mixes brand in Commonwealth Independent States (CIS) countries, and commands the largest market share of Russia’s instant coffee market.

“Following the collapse of the Russian ruble in 2014, the group has successfully diversified its sales through deepening its penetration in emerging markets,” Kaur says.

In 2013, the group launched its iced coffee product, Café Pho, in Vietnam. According to Kaur, it is now among the top five leading brands by volume share and a top three player based on value share in the Vietnam 3-in-1 instant coffee market.

“Sales contribution from Russia was about 60% prior to the ruble’s collapse in 2HFY2014 but has since fallen to 40%, mainly due to its geographic expansion into regions such as Vietnam and diversification efforts into the upstream business,” Kaur says.

Moving forward, the analyst believes Food Empire could see strengthening margin from cost rationalisation.

“Efforts to streamline operations and the exit of its loss-making Myanmar business improved 9MFY2019 reported net margin by 2.6 percentage points to 9.8%,” Kaur says. “The group is set to have pulled off a record year in 2019 – with the highest level of reported net profit – underpinned by stable revenue growth coupled with margin expansion.”

For 9MFY2019 ended September 2019, Food Empire reported a 37.4% jump in earnings to US$21.1 million ($28.9 million), even as revenue for the period came in relatively flat at US$215.3 million.

Selling and marketing expenses were 11.7% lower at US$32.1 million, led by the rationalisation of underperforming businesses.

“With management’s focus on key markets and less of a drag from underperforming markets, margin should continue to trend upwards,” Kaur says.

“We estimate a net margin increase of 2.5 percentage points and 0.3 percentage point in 2019 and 2020 respectively as we expect cost savings from the streamlining exercise and improvement in scale,” the analyst adds. “With a stable revenue growth, we forecast earnings to grow at 9.4% CAGR for 2019-21. We note that 2019 is set to be a record year for the group as it reports the highest level of net profit.”

Kaur reckons that Food Empire’s low valuation is due to the lack of street coverage. Notably, SGX-listed peers such as Super Group and Viz Branz were acquired and privatised at significantly higher valuations of 30.0 times and 16.4 times, respectively.

“Visibility should improve given its wider core earnings base, reduced geographical dependency, and operational leverage at the tipping point,” Kaur says.

As at 4.46pm, shares in Food Empire are trading 3.0% higher, or up 2 cents, at 68 cents.

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