RHB Bank Singapore’s Alfie Yeo has kept his “buy” call on Food Empire with an unchanged target price of $1.75, despite recent growing coffee prices and earnings cuts due to higher input costs.
“We like Food Empire for its strong balance sheet, cash generation ability, market share traction, valuation, and share buyback initiative,” says the analyst.
“Growth continues to be driven by capacity expansion of its ingredients business,” he adds.
Yeo notes that coffee prices have increased by 26% from US$179 ($241.95) per pound to US$245 per pound currently since 2HFY2023. As coffee forms the bulk of Food Empire’s input, these sustained higher coffee prices could result in some pressure on margins going forward, he writes.
The analyst adds that the company’s gross margins were subdued at under 30% when coffee prices reached a high of US$258 per pound in FY2022. Yeo anticipates slight margin pressure going forward given that the coffee price has rallied since 2HFY2023.
In response, the analyst has reduced his gross margin assumption from 33.5% to 33%, which is higher than previously given Food Empire’s stronger current portfolio as compared to FY2022.
“That said, Food Empire is a brand company which can implement resizing (number of sachets) and repricing strategies to mitigate higher raw material prices,” adds Yeo.
In light of these factors, the analyst has consequently lowered his earnings forecast for FY2024 - FY2026 by 3% each.
Despite this, Yeo anticipates overall growth for Food Empire led by marketing and promotion strategies in various markets. With the addition of the company’s Malaysia operation commencing sales for its new non-dairy creamer production capacity from 2QFY2024, the analyst notes that management expects it to reach full utilisation in the next five to six years.
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Food Empire’s results for the 1QFY2024 ended March 31 was in line with the analyst’s estimates, increasing 14.5% y-oy to US$118 million. Growth was driven by the company’s key segments which include a 27.4% y-o-y revenue growth in Russia, Food Empire’s largest market. However, the analyst notes that due to the 23.6% depreciation of the Russian ruble against the American dollar, Russia recorded just 3.2% y-o-y revenue growth at US$39 million after conversion.
The analyst also adds that Ukraine, Kazakhstan, and the Commonwealth of Independent States (CIS) segments grew 15.7% y-o-y to US$30 million, while South East Asia grew 35.3% y-o-y to US$30 million as well.
“Overall, there were increased marketing and promotional activities, higher production volume growth from Malaysia and India manufacturing plants, and robust pricing strategy in key markets,” says Yeo.
With the exception of a lower gross profit margin, the analyst’s forecasts remain largely unchanged.
That said, potential downside risks to Food Empire’s earnings and margins identified by Yeo include disruption in operations resulting from the Russia-Ukraine conflict and negative effects from the change in the value of currencies from Russia and the CIS countries.
Food Empire's environmental, social and governance (ESG) score sits at three (out of four), a slight drop below the country median of 3.1. As per RHB’s in-house proprietary ESG methodology, the analyst’s target price includes a 2% discount to Food Empire’s intrinsic value.
As at 11.45am, shares in Food Empire are trading at 1 cent lower or down 0.97% at $1.02.
