Food Empire Holdings has reported earnings of US$6.8 million for its 1QFY21, up 3.9% y-o-y. Revenue in the same period was up 3.4% to US$76.8 million, led by stronger demand for its products in southeast Asia.

 

The company also suffered lower forex losses and incurred lower sales related expenses. However, raw materials and transportation costs increased.

 

Food Empire notes that its main market, Russia, continues to suffer from the pandemic although the situation is &ldquo generally under control&rdquo and it &ldquo has not faced any major interruptions&rdquo in its operations in 1Q2021. 

 

However, since April 2021, Ukraine, is other key market, is seeing the peak of its third Covid-19 wave.

 

&ldquo Despite the uncertain and volatile operating conditions, the Board is confident that Group&rsquo s businesses will remain resilient, backed by an experienced management team and a healthy balance sheet,&rdquo the company says.

 

As at March 31, cash and cash equivalents stood at US$70.3 million and it can fulfil its near-term obligations, meet its debt covenants and service its debt obligations.

 

RHB Group Research analyst Jarick Seet has maintained his &ldquo buy&rdquo rating on Food Empire with a higher target price of $1.27 from 80 cents previously.

 

The revised target price comes following Food Empire&rsquo s stronger performance for the 4QFY2020 ended December. Despite y-o-y revenues decreasing due to Covid-19 impacting sales, Food Empire was able to sequentially improve from 2QFY2020 onwards and reported record FY2020 results.

 

The company&rsquo s FY2020 earnings increased by 2.9% to US$26.5 million ($35.2 million) due to better margins, which management attributes to solving the operational and logistical issues caused by the pandemic and lower marketing and administrative costs. Food Empire declared record dividends of 2.2 cents per ordinary share for the period.

Seet expects the improved margins and increasing demand to underpin a strong rebound for Food Empire&rsquo s FY2021 performance.

 

&ldquo We expect demand to remain resilient, and increase in FY2021. Note that 4Q20 profitability was 11.5% stronger on a q-o-q basis. Going forward, management has also revealed that marketing and administrative costs are likely to remain low this year, even though revenue is likely to rebound further,&rdquo he writes.

 

In addition, the company will likely benefit from the appreciation of the ruble in November 2020, given its position as a market leader in Russia.

 

To this end, Food Empire remains one of Seet&rsquo s top sector picks, given that the company is undervalued compared to its peers.

 

&ldquo At 11 times FY2021 price-to-earnings (P/E), Food Empire is among the cheapest consumer staples players with a proven track record. Note that its peers are trading at 20-30x P/Es. With the company being a market leader in Russia and Ukraine, we remain bullish on its outlook, and maintain a &lsquo buy&rsquo call,&rdquo Seet writes.

 

&ldquo Privatisation may be a possibility, given its undervalued status. Management has also been aggressively buying back shares in Dec 2020 and Jan 2021. The last share buyback price was at 76 cents per unit &ndash on Jan 21, before the black-out period. We expect this to continue, as management believes the stock is deeply undervalued vs its peers and acquisition targets,&rdquo he adds.

 

UOB Kay Hian analysts John Cheong and Clement Ho have maintained &ldquo buy&rdquo on Food Empire, as they both &ldquo expect another year of record earnings&rdquo for the company.

On that, the analysts have also upped Food Empire&rsquo s target price by 37% to $1.30 from 95 cents previously, on the company&rsquo s &ldquo compelling valuation&rdquo .

 

&ldquo While the share price has increased 22% since we raised our target price on Jan 18, we see room for upside as valuation remains attractive at 12 times FY2021 price-to-earnings (P/E) vs peers&rsquo average of 25 times,&rdquo they write in a report dated Feb 9.

 

Due to the company&rsquo s &ldquo resilient&rdquo core earnings, and leading position in its core markets in Eastern Europe, as well as growing presence in Vietnam, its second-largest market, Cheong and Ho believe the valuation between Food Empire and its peers will narrow.

 

Given the stock&rsquo s lower valuation, Cheong and Ho believe there is a possibility of a takeover offer or privatisation of the company.

 

&ldquo In addition, in the past, SGX-listed peers including Super Group and Viz Branz were acquired and privatised at significantly higher valuations of 30.0 times and 16.4 times respectively,&rdquo they note.

 

&ldquo We raise our target price to $1.30 on a higher valuation multiple of 16.6 times FY2021 P/E, or 1 standard deviation above its historical average mean P/E, as we opine the group deserves to trade at a higher valuation,&rdquo they add.

 

The analysts also expect &ldquo another record year for core earnings, underpinned by an improvement in margins&rdquo .

 

Despite the lockdowns in Food Empire&rsquo s core markets, Cheong and Ho see the company&rsquo s lower revenue being offset by better margins due to hikes in its average selling prices (ASPs) and cost management.

 

&ldquo As such, our forecast incorporates 10.2% y-o-y growth in core earnings to US$28 million ($37.1 million) for 2020, the group&rsquo s highest level of core net profit (excluding forex loss) since its listing,&rdquo they say.

 

Cheong and Ho have also maintained their net profit forecasts for 2021 and 2022 at US$31 million and US$33 million respectively.

 

The company has yet to announce its results for 4QFY2020, but the analysts believe that investors can expect a &ldquo strong set a results&rdquo due to the company&rsquo s &ldquo aggressive&rdquo buybacks.

 

The company has bought 3.3 million shares or 0.6% of its share base since the beginning of the buyback mandate on April 23, 2020.

 

&ldquo This was mainly carried out in 4QFY2020 to January [this year] when Food Empire Holdings bought back around 3 million shares for around $2 million, potentially signalling a strong set of results for 4QFY2020 and confidence in its business outlook in 2021,&rdquo they write.

 

RHB&rsquo s small cap asean research team reckons that Food Empire is a steal. 

&ldquo At a market valuation of 10x FY21F P/E, Food Empire is one of the cheapest consumer staples stocks,&rdquo explains analyst Jarick Seet in a Feb 8 note.

 

He believes the counter could even be a candidate for privatisation, given its undervalued position.

 

By comparison, the food manufacturer&rsquo s peers are trading at 20 &ndash 30x P/E, says Seet who is maintaining a strong &lsquo buy&rsquo call on the counter but at a revised target price of $1.27.

 

This is up 47 cents from his previous 80 cent call and is believed to be give a 44% upside from its 88 cent close on Feb 5.

 

&ldquo The worst is over,&rdquo explains Seet. &ldquo Due to Covid-19 and mass distribution of vaccines, we expect demand for Food Empire&rsquo s products to grow,&rdquo he adds.

 

This is unlike FY2020 when the food manufacturer&rsquo s sales had taken a hit for almost two months after strict lockdowns were imposed across the markets it operates in.

However, Seet notes that the management has &ldquo learnt to solve these problems and does not expect such matters to be repeated&rdquo .

 

While FY2020 revenue had inched down y-o-y across the markets, he observes that they have &ldquo improved robustly&rdquo on q-o-q basis, since 2QFY2020 ended June. Excluding foreign exchange costs, he says that the company would have recorded an impressive earnings growth of 87% q-o-q.

 

Seet is anticipating resilient demand for Food Empire&rsquo s products in its last quartered ended in December as well as in FY2021.

 

He is expecting its recurring PATMI (profit after taxes minus interest) to edge up by 10%, 20% and 5% between FY2020 to FY2022.

 

Seet is also looking at the company maintaining its FY2020 final and special dividend per share of 2 cents, which will translate to an FY2020 yield of 2.6%.

 

These estimates were arrived at after applying a discount to account for the fluctuation in the value of the Russian Rubble (RUB) which had increased at the end of November 2020. Seet believes this can benefit the group&rsquo s numbers, even though it can negate the effect by adjusting its selling prices.

 

The way he sees it, the key risks to this is strict lockdowns causing operational disruptions and a sharp depreciation in the RUB and currencies of other countries it has operations in.

 

UOB Kay Hian analyst John Cheong and the Singapore research team have highlighted BRC Asia, Food Empire, Frencken and InnoTek as its top buy picks among the small-mid cap sector.

 

He has given all three &ldquo buy&rdquo calls with target prices of $1.88, 88 cents and 82 cents respectively.

 

The brokerage has highlighted stocks based on laggards that are backed by solid earnings and a healthy balance sheet, along with stocks that have benefitted from China&rsquo s recovery. It has also highlighted stocks with the ability to recover quickly post-Covid-19, says Cheong.

 

For stocks such as Food Empire, Frencken and InnoTek, which are categorized as stocks that are of &ldquo laggard quality small-mid cap backed by solid earnings&rdquo , the companies have reported decent 9MFY2020 core net profit.

 

The way Cheong sees it, Food Empire is trading at an undemanding valuation of 8.5x 2021F price-to-earnings (P/E), which is a &ldquo significant discount to peers&rsquo average of approximately 20x 2021F P/E despite its growing presence in the Vietnam market and leading position in its core markets in Eastern Europe&rdquo .

 

&ldquo In spite of the challenges in 2020 including the Ruble depreciation and the lockdown in key markets in 2QFY2020, the group has reported decent 9MFY2020 core net profit (excluding forex losses) of $23 million,&rdquo he adds.

 

&ldquo This represents an 11.2% y-o-y growth on the back of better cost control and higher ASPs which mitigated the decline in revenue (-5.6% y-o-y).&rdquo

 

Frencken&rsquo s 3QFY2020 earnings of $13.3 million brought its 9MFY2020 net profit to 83% of the brokerage&rsquo s full-year estimates.

 

&ldquo The business update reflected earlier- and stronger-than expected operating leverage, buoyed mainly by a better sales mix and greater cost control efforts. We expect the semiconductor segment to continue driving growth going forward, driven by the accelerating development of 5G technology,&rdquo notes Cheong.

 

InnoTek looks set to benefit from China&rsquo s recovery in auto sales and the social distancing measures arising from Covid-19, which have boosted demand for large screen TVs.

 

&ldquo We expect [InnoTek&rsquo s] earnings per share (EPS) to grow by 229% h-o-h in 2H20 and 19.4% y-o-y in 2021. InnoTek has a net cash position of $73 million. At current prices, the stock trades at an undemanding valuation of 6.4x 2021F P/E, a discount to peers&rsquo average mean of 11.0x,&rdquo he says.

 

Jiutian Chemical, China Sunsine and Sunpower are those that will be able to leverage off China&rsquo s recovery, says Cheong.

 

For Jiutian Chemical, China&rsquo s recovery has led to enhanced demand for raw materials used to manufacture consumer end products, including fine chemicals produced by Jiutian Chemical.

 

&ldquo These factors were apparent in 3QFY2020 results which beat our expectations due to higher-than-expected average selling prices (ASPs). We expect better demand to drive further earnings growth. The recent retracement in share price (- 41% from its recent high of 12 cents) presents a buying opportunity as the stock trades at an attractive valuation of 3.8x 2020F P/E and 2.2x 2021F P/E,&rdquo he says.

 

&ldquo Current dimethylformamide (DMF) ASP of around Rmb8,000/tonne is still way above our expectation of Rmb7,200/tonne for 2021. Also, earnings surprise could come from higher volume of dimethylamine (DMA), which is the feedstock of DMF,&rdquo he adds.

 

On the back of a rise in automobile sales in China as the domestic economy recovers, selling prices of rubber accelerators &ndash the main earnings for China Sunsine &ndash are showing signs of recovery.

 

&ldquo In 2021, we expect net profit to grow by 46% y-o-y on the back of China Sunsine&rsquo s expanded production capacity. Furthermore, higher vehicle sales in China are expected to drive increased demand for tyres, hence leading to a potential 10% rise in the ASP of rubber accelerators from a low base in 2020,&rdquo notes Cheong.

 

Sunpower&rsquo s plants have resumed full work amid China&rsquo s economic recovery, which, according to Cheong, was apparent in its robust set of results for 3QFY2020.

&ldquo The green investment (GI) segment is on track to post a double-digit y-o-y growth for 2020 while the manufacturing and services (M& S) orderbook maintained its record-high orderbook of RMB2.8 billion as of end 3QFY2020. Management has earmarked the GI segment as the key driver for the group,&rdquo he says.

 

&ldquo We expect: a) full-year contributions from newly-acquired GI plants b) anticipated additional contributions from Phase 2 of the Shantou Project and the new Xintai Zhengda plant c) continuous acquisition of new customers following mandatory closures of &ldquo small dirty boilers&rdquo and/or mandatory relocations into industrial parks d) organic growth from existing customers and industrial parks served by the group&rsquo s GI plants and e) record-high M& S orderbook of Rmb2.8b to help drive earnings for the rest of 2020 and beyond,&rdquo he adds.

 

Stocks that are expected to benefit from a normalised recovery post Covid-19, include names in the construction and F& B services sectors such as BRC Asia, Kimly and Koufu.

For BRC Asia, build-to-order (BTO) projects continue to be favourable for the company with recent new HDB project launches in Tengah, Bishan and Toa Payoh being oversubscribed.

 

&ldquo We opine that the construction industry is still a laggard and new construction contracts awarded will likely recover off the low seen in Aug 2020, with Sep 2020 contracts awarded amounting to $840 million (+102% m-o-m),&rdquo says Cheong.

 

&ldquo With the gradual normalisation of construction activities and sustained margins, we are optimistic of BRC Asia&rsquo s recovery and expect earnings to rebound strongly in FY21 at 88% y-o-y. BRC Asia currently trades at 8.8x FY21F earnings, below its long-term average (excluding outliers).&rdquo

 

Kimly, which is the largest coffeeshop operator in Singapore, should benefit from Covid-19, as consumers become increasingly price-sensitive.

 

The group has a high net cash balance of $43.9 million, a higher dividend yield compared to its peers and strong future earnings growth from its newly-acquired and refurbished coffee shops.

 

&ldquo We expect a strong net profit compound annual growth rate (CAGR) of 9.3% for FY21-23. At current valuations, Kimly is trading at 12.5x FY21F P/E, well below its average 3-year mean P/E of 15.0x, and Singapore peers&rsquo 2021F P/E of 22.5x.&rdquo

 

While same-store sales have declined by 20% y-o-y in July to October 2020, sales at outlets in the heartlands and full-service restaurants have improved significantly, says Cheong.

 

&ldquo We expect a gradual recovery for outlets located at tertiary education and downtown area (where sales have been hampered by work-from-home measures) in 2021 as Covid-19 cases come under control in Singapore&hellip Apart from gradual resumption of activities, future growth drivers are contributions from Deli Asia (which has resilient earnings), new outlets, and its new Integrated Facility. Key share price catalyst for the stock is the opening of Singapore and Macau borders,&rdquo he adds.

 

Despite the resurgence of Covid-19 in Food Empire&rsquo s core markets, RHB Group Research believes that the group&rsquo s latest 3QFY2020 results were decent. With that, analyst Juliana Cai has kept her &ldquo buy&rdquo call on Food Empire with a higher target price of 80 cents from 72 cents previously.

 

To recap, Food Empire on Nov 11 issued a business update for its third quarter ended September, which posted a net profit after tax of US$6.3 million ($8.5 million), some 19.5% lower y-o-y. Revenue was also 8.5% lower y-o-y at US$70.3 million, as a result of the depreciating Russian and Ukrainian currencies, as well as lower sales from Vietnam due to Covid-19 disruptions.

 

Excluding the currency exchange depreciation, Food Empire would have recorded a net profit of US$9.0 million, 2.0% higher y-o-y, which was above the analyst&rsquo s expectation.

 

While revenues were down y-o-y across all the markets, it has shown strong sequential improvement from 2QFY2020. Management highlighted that demand for their instant coffee products has been stable.

 

Barring strict national lockdowns that might result in operational and logistical issues, Cai expects sales volume to remain fairly resilient despite the pandemic. With that, she believes that the worst is over for Food Empire.

&ldquo We expect the full-year to end strongly and raised our FY2020-2022 recurring PATMI by 14%, 4% and 1%,&rdquo says Cai, whose estimations on the group&rsquo s recurring net profit are US$27 million for FY2020, US$29 million for FY2021, and US$32 million for FY2022.

 

However, due to the volatility surrounding the RUB and the related currencies of the Commonwealth of Independent States (CIS), Cai has lowered her target P/E from 12 times to 11 times.

 

&ldquo Given that the group is able to generate a fairly resilient set of earnings amidst the challenges posed by the pandemic, we expect it to maintain last year&rsquo s final and special dividends totalling 2 cents, per share. This raises our expected dividend yield to 3.4%,&rdquo she adds.

 

Moving into FY2021, the group is expected to focus on maintaining decent earnings amid the challenging environment. Hence, advertising and promotion expenses are expected to be kept low, while keeping revenue and market share stable.

 

On the positive side, its second India plant should commence production next year as the country lift its restriction for business travels to facilitate the commissioning of the plant.