RHB Bank Singapore’s analyst Alfie Yeo has maintained his “overweight” call on the food and beverage (F&B) sector while remaining positive on the sector’s valuation and growth outlook.
Yeo names Thai Beverage Y92 (ThaiBev), Delfi, and Food Empire as his top picks, with “buy” calls and target prices of 71 cents, $1.33 and $1.45 respectively.
This comes on the back of improvement in gross domestic product (GDP) and consumption in Vietnam, and Indonesia over the longer term, as per the analyst’s expectations.
“Data points for Thailand and Indonesia’s consumer sentiment in May 2024 has weakened,” writes Yeo in his July 9 note.
Despite this, the analyst notes that Indonesia’s reading remains “lofty” with its consumer confidence standing at 125.2 points in May, a slight drop from its 11-month high of 127.7 points recorded in April.
Income expectations, job availability, and economic outlook in Indonesia have also declined slightly.
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In comparison, Thailand’s consumer sentiment has continued to weaken in recent months, with its consumer confidence dropping from 62.1 points in April to 60.5 points in May following slow economic recovery.
Despite the decline in consumer sentiment, Yeo notes that GDP growth remains “buoyant”. GDP growth for Thailand and Vietnam are expected to increase from 1.9% and 5.1% last year to 2.4% and 6.0% respectively this year, as per the RHB’s economics team’s estimates.
Meanwhile, they expect Indonesia’s GDP growth to remain at a robust 5% next year.
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However, due to the recent surge in commodity prices, the analyst has lowered his subsector earnings estimates slightly.
Coffee prices have increased to US$230 ($310.59) per pound, while cocoa prices have reached US$8,000 per metric tonne.
“We believe both Food Empire and Delfi hedged lower prices in their inventory for now, and do have pricing and right sizing options to defend their margins going forward,” says Yeo.
Additionally, the analyst also notes that the F&B sector growth strategies continue to attempt to improve volume sales and focus on market penetration.
While ThaiBev aims to secure Chang Beer as Thailand’s market leader by the end of the year, Food Empire is also building up its factory capabilities in Kazakhstan and Malaysia, and exploring Vietnam to reel in higher volume sales.
Meanwhile, Delfi is focused on growing volumes through the premium and value format, as well as in the Modern Trade Independents channel.
The analyst sees the sector valuation as compelling, with an “attractive” valuation of 6 times - 10 times forward P/E and a 5.2% - 6.3% dividend yield.
Despite recent high commodity prices, Yeo believes his estimates to be conservative, with his sector’s earnings growth compound annual growth rate for FY2023 to FY2026 at 4.3% y-o-y, driven by GDP and consumption recovery, and market penetration and volume sales growth strategies.
That said, key sector downside risks identified by the analyst include lower-than-expected consumption demand, a further spike in raw material prices that could affect gross profit margins (GPM), and the negative effect of exchange rates.
