Food Empire Holdings
Price targets:
RHB Bank Singapore ‘buy’ $1.36
UOB Kay Hian ‘hold’ $1
Downgrades issued amid short-term price challenges
RHB Bank Singapore analyst Alfie Yeo has kept his “buy” call on Food Empire with a lower target price of $1.36 from $1.52 following a weaker-than-expected 1HFY2024 ended June.
In his Sept 2 report, Yeo notes that Food Empire’s 1HFY2024 Russia operations revenue declined 4% y-o-y to US$68 million ($88.8 million) due to the depreciation of the ruble despite achieving 13% y-o-y revenue growth in local currency terms.
Gross profit margin contracted five percentage points (ppts) to 30% due to short-term price disruption in Russia following challenges in passing higher prices to customers while input costs were elevated.
As a result of the lower gross margin, Food Empire’s ebit missed Yeo’s expectations and declined by 18% y-o-y to US$29 million, with ebit margins 4.8 ppts lower at 12.6%.
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Yeo sees growth over the next few years, driven by higher production capacity. He notes that Food Empire has already expanded its Malaysian non-dairy creamer production capacity and is planning for a second snack factory by 1H2025.
The analyst continues to like Food Empire for its strong balance sheet, cash generation ability, market share traction, valuation and growth led by capacity expansion.
Meanwhile, UOB Kay Hian analysts John Cheong and Heidi Mo have downgraded Food Empire to “hold” after seeing “near-term headwinds” such as high coffee costs and the devaluation of the Russian ruble against the US dollar (USD).
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Even though Food Empire’s earnings for the 1HFY2024 fell by 11.3% y-o-y to US$23.6 million, this remained in line with Cheong and Mo’s expectations at 51% of their full-year estimate.
The analysts note in their Sept 4 report that the y-o-y decline is largely due to short-term price disruptions in the Russian market, increased raw material prices and operating costs, partly offset by higher contributions from the rest of Food Empire’s operating markets.
As a result, the company’s 1HFY2024 gross margins fell by 5 ppts y-o-y to 30% while net margins declined by 3 ppts y-o-y to 10.5% respectively, albeit still matching Cheong and Mo’s estimates.
In Russia, Food Empire saw a 3.6% y-o-y decline in revenue to US$68.1 million, mainly due to the depreciation of the Russian ruble against the USD and from customers’ excess stock levels.
“We expect this to continue to impact Food Empire’s near-term performance as it will take time for customers to deplete their stockpile,” Cheong and Mo write.
The company is also expected to face continued margin pressure on the back of higher coffee prices next year. In addition, the ongoing Russia-Ukraine conflict may also add to logistics and distribution costs.
“Food Empire will need time to stabilise prices to maintain revenue and margins, which are partly determined by varying stock levels among retailers before it can raise prices in the Russian market. We therefore expect gross margins to remain muted at 29%–30% for FY2024–FY2026,” the analysts add.
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Given the near-term headwinds, the analysts have lowered their dividend forecast to 5 cents per share from 10 cents per share as they no longer expect Food Empire to distribute special dividends during the year. The company is also likely to need to finance its new production facilities, the analysts note.
Despite this, analysts remain cautiously optimistic about Food Empire’s prospects. Referring to a report by Allied Market Research, the analysts note that the global instant coffee market is expected to grow at a CAGR of 6.4% to reach US$60.7 billion from 2023 to 2032.
In addition to their downgrade, the analysts have lowered Food Empire’s target price to $1 from $1.30, which is based on Food Empire’s FY2024 EPS valuation of 8.4 times. The new target price is also pegged to 0.5 standard deviation (s.d.) below the counter’s long-term historical mean. This is lower than the previous mean to reflect the more challenging environment. — Khairani Afifi Noordin & Felicia Tan
Seatrium
Price target:
CGS International ‘add’ $2.69
Stronger 2HFY2024 to be expected
CGS International analysts Lim Siew Khee and Meghana Kande are keeping their “add” call on Seatrium with an unchanged target price of $2.69 after hosting the group’s management recently.
Following conversations, the analysts say they remain “positive” on Seatrium’s efforts to improve its margins and profitability.
During the session, investors mostly questioned the group about the progress of its legacy projects and further provisions, order outlook and information requests by the Monetary Authority of Singapore (MAS) and Commercial Affairs Department (CAD), they add.
In their Sept 3 report, the analysts note that legacy projects were defined as the two loss-making contracts in the US. One is a high-specification trailing suction hopper dredger (TSHD) for Manson Construction. The other is a wind turbine installation vessel (WTIV) for Dominion Energy that is due to be delivered by the end of 2024 or early 2025.
“Management is putting a strong emphasis on project management and attempting to minimise further provisions. 1HFY2024 provision for onerous contracts amounted to $70 million. Shortage of labour, such as welders, would result in cost overruns, in our view,” they add, noting that Elon Musk’s SpaceX, which also requires welders, has set up its new office and industrial factory in Brownsville, Texas.
The analysts believe that the latest investigation could be related to past statutory disclosures. During the session, Seatrium stressed that the investigation was not about a fresh allegation and is continuing to cooperate with the authorities.
In the analysts’ view, sizeable orders could be near-term catalysts for the group. “We believe Seatrium could be finalising a contract with BP for its Kaskida floating production unit (FPU) in the US Gulf of Mexico — BP had achieved a final investment decision on the project in July 2024 and expects production to start in 2029,” they write.
Seatrium was awarded a letter of intent for the project’s engineering, procurement, construction and commissioning in June. The analysts now estimate the contract size to range between US$600 million ($784 million) to US$700 million.
In 1HFY2024 ended June 30, Seatrium posted earnings of $36 million, thanks to its “aggressive” cost savings in selling, general and administrative expenses (SG&A) and better gross margins.
That said, the group’s share price has underperformed by 7% despite its results announcement on Aug 2. The underperformance is likely due to the market’s lack of confidence in Seatrium’s ability to improve its core gross margins, note Lim and Kande. The market may remain concerned over any further provisions for onerous contracts, they add.
That said, Seatrium remains the analysts’ top pick as they see potential of a “strong” turnaround in 2HFY2024 with an estimated 184% h-o-h increase in net profit. — Felicia Tan
Civmec
Price target:
Maybank Securities ‘buy’ $1.05
New defence contracts may boost order book
Maybank Securities analyst Eric Ong has kept “buy” on Civmec P9D with a target price of $1.05 following the company’s FY2024 ended June results.
In 2HFY2024, Civmec posted a patmi of A$32.5 million ($28.5 million), up 10.6% y-o-y, bringing full-year earnings to A$64.4 million, up 11.7% y-o-y.
Civmec declared a final dividend per share (DPS) of 3.5 Australian cents, taking the total DPS to 6 Australian cents. Given its net cash balance sheet, Ong believes there is still room for the company to raise its payout ratio.
Revenue in 2HFY2024 rose 31.3% y-o-y to A$541.1 million, mainly due to increased activity levels, especially in its resource and infrastructure and defence segments, which more than offset the weaker energy segment, which was down 58% y-o-y.
While Ong notes that Civmec’s order book declined by 17.9% y-o-y to A$853.4 million as at end-June, the company is currently working towards formalising the deal for a strategic joint venture to tender on the LAND8710 landing craft heavy shipbuilding programme for the Australian government. This could allow Civmec to participate in over A$25 billion of future works.
Meanwhile, Civmec’s new facility in Port Hedlands is now fully operational. The company has commenced delivering maintenance work for local clients, Ong points out.
The company has also purchased an established adjoining workshop next to its existing land in Gladstone, Central Queensland. Ong notes that this acquisition has expedited Civmec’s objective to establish a permanent base of operations in the region. The company has since moved into the newly acquired facility, thus enabling it to enhance its service offering and capabilities further.
The move to redomicile Civmec’s parent company to Australia was passed on Aug 1 and sanctioned by the court on Aug 28. Civmec will lodge the court order on Sept 4 with the Accounting and Corporate Regulatory Authority of Singapore, and the scheme will take effect on the date of lodgement.
Shares of the newco will start trading on both the Singapore Exchange S68 and Australian Securities Exchange on Sept 5.
This strategic initiative is designed to better align Civmec with local manufacturing requirements in Australia, thereby improving the number of opportunities available to the group, Ong adds. — Khairani Afifi Noordin
