SINGAPORE (Aug 15): RHB Research is downgrading its call on Food Empire to “neutral” from “buy” while lowering its target price on the stock to 60 cents from $1.07 previously to reflect a lower target P/E of 14 times as a result of lower valuation, versus the peer average of 16 times.

The research house has also applied a 10% discount to peers to account for geopolitical risk in Russia and other CIS countries, which believes would limit Food Empire’s upside in the near-term.

This comes on expectations of Food Empire to incur more forex losses for FY3Q18, after the group recorded a foreign exchange (forex) loss of US$2 million in its latest 2Q set of results as the RUB and EUR weakened against the USD.

In a Wednesday report, analyst Juliana Cai notes that the group derives about 40% of its revenue from Russia, while the group’s loans for the purchase of equipment at its new plant are denominated in EUR.

Nonetheless, Cai believes Food Empire is “heading in the right direction” to diversify its revenue stream over the long run, and expects core earnings excluding forex changes to grow at a CAGR of 15% over FY18-20F

She also notes that raising the prices of Food Empire’s products in phases – as mentioned by the group’s CEO, Sudeep Nair – would partially mitigate the negative impact of currency depreciation on the group’s revenue, gross margin and core earnings excluding forex losses.

“We believe the Indochina market is critical in helping Food Empire diversify outside of the Commonwealth of Independent States countries. However, such a stark increase in Indochina’s revenue was not without cost. We understand from management that the group has been spending on advertising and promotions (A&P) in Indochina to boost its brand value,” says Cai.

“However, with the US imposing more sanctions on Russia, we expect more downside risks from the depreciation of the RUB and its regional currencies. As such, we see limited reasons to be vested in Food Empire over the near term given that 60% of its revenue is generated from Russia and other CIS countries,” she adds.

As at 10:16am, shares in Food Empire are trading flat at 56 cents or 1.21 times FY18F book value.