UOB Kay Hian is reiterating its “buy” recommendation on Food Empire F03 with a target price of $1.28, as analyst John Cheong and Heidi Mo see the group’s continued share buyback in 1QFY2023 ending March, which has contributed to a higher share price, especially after recording a 134% y-o-y increase in FY2022 core earnings of US$45 million ($59.9 million).
During the first quarter period, Food Empire bought back close to two million shares at 65 cents to 90 cents. This is close to the 52-week high share price of 96 cents.
With the group also doubling its FY2022 dividend and strong core earnings growth in the last four quarters, the analysts believe that the group is confident in its future outlook.
The growth was mainly driven by an increase in consumer demand for Food Empire’s products given their affordable price points, improving net margin from easing of supply chain issues and improvement in product mix.
In addition, the group has declared a dividend of 4.4 cents per share for FY2022, double FY2021’s dividend of 2.2 cents per share
“Also, any positive development in the Russia-Ukraine conflict could lead to further valuation re-rating for FEH, which is trading at a 40%-50% discount versus peers,” say Cheong and Mo.
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On the outlook, the group expects strong consumer demand across its segments, despite rising inflationary pressures and average selling prices (ASPs). This is given the consumer-staple nature of the group’s products, demand is relatively price inelastic, say the analysts.
Even as prices increase, the group’s products in the coffee segment remain to be affordable enough for mass appeal, leading to a sustainable or stronger demand in FY2022. Hence, the analysts see that sales volumes are more sheltered from market volatilities. “With supply chain disruptions easing in some markets, we forecast higher earnings and improved margins moving forward,” say Cheong and Mo.
With the strong levels of demand sustained amid inflationary pressures and currency volatility due to geopolitical uncertainties, the analysts’ forecast incorporates a 7% increase in FY2023 core earnings and another 7% increase in FY2024 core earnings.
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“We believe Food Empire is attractively valued at 8.3 times FY2023 P/E, 1 standard deviation below its long-term mean and at around a 40-50% discount to its local and regional peers,” say the analysts.
As at 3.45pm, shares in Food Empire are trading 3% higher at $1.03.
