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 September 2 report, Yeo notes that Food Empire’s 1HFY2024 Russia operations revenue declined 4% y-o-y to US$68 million due to the depreciation of the ruble despite achieving 13% y-o-y revenue growth in local currency terms.
On the back of the short-term price disruption in Russia following challenges in passing on higher prices to customers while input costs were elevated, gross profit margin contracted five percentage points (ppts) to 30%.
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 4.8ppts lower at 12.6%.
Yeo believes that it may take another quarter for pricing challenges in Russia to ease. As such, RHB has imputed lower gross margins in its forecasts, resulting in a reduction in its FY2024-FY2026 estimates by 11%, 9% and 9% respectively.
That said, 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.
“In Kazakhstan, the company is constructing its first coffee mix facility, with production scheduled to commence in 2025. There are also preliminary plans to establish another Vietnam instant coffee factory. The US$40 million funding from Ikhlas Capital will come in handy to help in its expansion in Asean, in our view,” he says.
RHB continues to like Food Empire for its strong balance sheet, cash generation ability, market share traction, valuation and growth led by capacity expansion.
As at 3.36pm, shares in Food Empire are trading 1.5 cents higher or 1.54% up at 99 cents.
