SINGAPORE (May 15): RHB Group Research’s analyst Juliana Cai is reiterating her “buy” recommendation on Food Empire with a target price of 75 cents from 88 cents previously.

On May 11, Food Empire released its business update, which saw net profit after tax fall some 13.3% to US$6.6 million from US$7.6 million, mainly due to foreign exchange losses as the Russian Rubble depreciated as a results from the oil crisis.

Excluding foreign exchange losses, core profit increased by 33% y-o-y US$9.5 million.

Revenue for 1Q20 increased by 5.0% to US$74.2 million, led higher contributions from the group’s markets in Ukraine, Kazakhstan and CIS; South Asia; and other markets. This was partially offset by a slightly lower contribution from Russia and Southeast Asia.

Due to the various lockdowns, the company’s Key Production, Sales and Distribution activities are still continuing but with some disruptions. It is also experiencing weaker offtake from stores in most markets, which is attributable to reduced customer footfall resulting from various forms of movement controls and/or safe distancing measures in these markets.

Food Empire also announced that its second coffee plant project in India, which was initially scheduled for completion and commercial production in middle of FY2020, will experience delays until international travel restrictions are lifted. Its first instant coffee plant has also experienced temporary disruption to production and faced intermittent logistics challenges.

Meanwhile, its The Non-Dairy Creamer, Snacks and Coffee packing facilities in Malaysia continue to operate with some supply chain delays being noted.

Apart from the foreign exchange losses, the company’s business was fairly stable in 1Q20. But Cai believes that 2Q20 will likely take a turn for the worse with various markets being in some form of lockdown while Russia and most of the CIS countries are seeing the full quarter impact of currency depreciation.

Sales volume in Russia and some of the CIS markets should be more severely impacted as footfall declined sharply for grocery retail. Vietnam, however, is not likely to be severely impacted due to the lower number of Covid-19 cases.

See: Food Empire records robust growth; declares higher dividend on better outlook

“Our sensitivity test suggests that 5% depreciation of the RUB could lower earnings by about 15%, all else unchanged. To mitigate the negative FX impact, we note that Food Empire has implemented about 10% price increase in certain key markets and we expect to see the full impact of the price hike in 3Q20,” says Cai.

“In addition, the group is now shifting its focus to higher-margin sales rather than chase topline growth to ensure sustainable profitability. Given it is largely in the staple food business, we believe that full-year sales volume would remain resilient as a whole. We expect sales volume to pick up once the lockdown eases in 3Q20 for most cities,” she adds.

Nonetheless, revenue estimates for FY20-22 have been cut by 7%, 5% and 4%, respectively; and core profit by 17%, 11% and 10%, respectively. This is due to the weaker currency and economic outlook in some of the company’s key markets.

As at 12.45pm, shares in Food Empire are trading 2% higher at 50 cents or 0.9 times FY20 book with a dividend yield of 2.9%.