The Covid-19 pandemic is slowly improving in some countries, with lockdown measures easing and market activities resuming. This is apparent in coffee products manufacturer and distributor Food Empire&rsquo s core markets in Russia and Ukraine.

This means an improvement in mobility trends at shops and the recovery in retail sales.

 

With that, UOB Kay Hian is remaining positive on Food Empire&rsquo s outlook and is keeping a &ldquo buy&rdquo recommendation on the stock with a target price of 85 cents.

 

To recap, in its latest 2Q20 results, the group&rsquo s revenue from Russia fell by 20% y-o-y, due to stay-at-home measures implemented at end-March. For most regions, footfall at shops plummeted as residences were confined to their homes, and food purchases were only allowed at shops closest to their place of residence.

 

But since June, Russia has been gradually easing restrictions and a three-stage reopening plan was announced by the federal government, with regional governors ultimately deciding how and when to proceed. With that, there has been an improvement in mobility trend at places such as grocery markets and specialty food shops. Ukraine has also seen similar patterns with restrictions being eased.

 

With the reopening of retail businesses in most regions, retail food sales in Russia rebounded with the pace of decline narrowing to -2.2% y-o-y in July, while retail turnover in Ukraine bounced back in July, registering a y-o-y growth of 7.8% for the first month since April.

 

This mirrors management&rsquo s guidance in 2Q20 of sales slowly reverting to pre-Covid-19 levels.

 

In a September 24 report, analyst Joohijit Kaur says, &ldquo We are encouraged by the sequential recovery in these markets and our forecast accounts for a moderate 5.1% y-o-y decline in core earnings in 2H20 compared with -24% y-o-y (excluding forex gain) in 2Q20.&rdquo

 

Furthermore, the group has managed to mitigate the impact of the volatile Russian Rouble by implementing a an average selling price (ASP) hike in April. With the price hike being carried out in stages, the analyst reckons that this will only be more apparent in the group&rsquo s 3Q20 results as compared to 2Q20.

 

Additionally, the group has also managed to contain cost, with admin expense being reduced by US$2 million in 2Q20, forming 13.2% of sales compared to 14.2% in 2Q19.

&ldquo Given the consumer staple nature of its products, low price point and its market leading position, demand for its products is relatively price inelastic and is fairly resilient in the face of an economic slowdown, in our view,&rdquo says Kaur.

 

Meanwhile in Vietnam, the group&rsquo s second largest and fast growing market, sales have been impacted less by the pandemic and have performed well.

 

While the group does not separately disclose Vietnam&rsquo s sales, the group&rsquo s Southeast Asia market (which includes businesses in Vietnam and Malaysia) registered a growth of 9.0% y-o-y in 2Q19, driven by the growth in sales volume in Vietnam.

 

&ldquo Although there was a slight resurgence in cases in early August, movement restrictions were mostly limited to affected provinces. As such, we do not expect it to have a major impact on the group&rsquo s operations and sales,&rdquo says Kaur.

 

Overall, the stock is trading at an attractive valuation of 8.6 times FY21 PE, a significant discount to peer average of 20 times FY21 PE despite its market leader position in its core markets in Eastern Europe and growing presence in Vietnam.

Rising optimism in the market may buoy the consumer sector in the coming quarters, though rising unemployment and overall economic toll from Covid-19 still remain causes for concern, say RHB in an August 28 note. RHB analyst Juliana Cai is maintaining &ldquo neutral&rdquo on the consumer cyclical and non-cyclical sector, preferring defensive staples with some exposure to recovery play. 

 

&ldquo Although we have started to see more optimism in the market as regional economies bottomed out in 2Q2020, the economic toll and rise in unemployment resulting from Covid-19 are likely to persist into 2H2020- 2021. This should pose continued challenges to overall consumption. We expect a full recovery only in 2022,&rdquo says Cai. 

 

Thai Beverage is RHB&rsquo s top pick for the sector, which also includes Food Empire, Kimly, Sheng Siong, Dairy Farm, Delfi, Japan Foods, Genting Singapore and Jumbo Group. &ldquo We believe Thaibev&rsquo s spirits segment (approximately 80% of EBIT) has demonstrated fairly resilient sales and earnings in its 3QFY2020 (Sep) results. Given that the bulk of its spirits product range is consumed at home, sales were largely unaffected by during the lockdown and temporary ban of alcohol sales,&rdquo notes Cai.

 

Cai is recommending &ldquo buy&rdquo on ThaiBev with a target price of 72 cents. 

 

&ldquo We note that Thailand has relaxed its restriction measures, lifted night curfews, with most people returning back to the office for work. We believe the company stands to benefit from the resumption of activities as sales for beer, non-alcohol beverage and restaurant segments should pick up from here on.&rdquo

 

With ongoing travel restrictions and rising unemployment in many markets worldwide, Cai notes that the hospitality sector, along with retail and transport, have been badly hit. Tourist-dependent operations will take longer to recover, she adds. 

 

&ldquo Although consumer confidence in the region has bottomed, with most nations relaxing national lockdowns and seeing a gradual resumption of activities, job insecurities, economic uncertainties and, high household debt will continue to weigh down on 2021 consumer sentiment and spending,&rdquo she says.

 

Cai expects consumer staples to be least affected by Covid-19. &ldquo With many people still working from home, players catering to home consumption should continue to show resilient results. We like Sheng Siong, a staple grocery retailer, which has benefitted from the lockdown and showed tremendous earnings growth in 2Q2020. That said, the market may have priced in a large part of this resilient performance as the stock has significantly outperformed the market YTD.&rdquo

 

&ldquo We now prefer F& B producers like Thaibev and Food Empire which have strong market share in their respective product segments, fairly resilient earnings and still trading at discounts to their peers and historical mean.&rdquo

RHB Group Research is keeping its &ldquo buy&rdquo call on Food Empire with a target price of 75 cents as the stock turned out to be more resilient than expected amid the Covid-19 pandemic.

 

In its latest 1H20 results, the group recorded earnings of US$13.4 million, just 1.1% higher than the previous year. Revenue was however 4.0% lower y-o-y at US$132.9 million, due to disruptions from a national lockdown in the group&rsquo s main market Russia, as well as the depreciation in Russian ruble.

 

Production has also been affected by lockdowns, as the group&rsquo s coffee plant in India faced cancellations and postponement of orders from customers.

 

The lower sales in 1H20 were partially offset by a 3% y-o-y growth in Ukraine, Kazakhstan and Commonwealth of Independent States (CIS) markets, as well as South-East Asia, where sales volumes were resilient and selling prices increased.

 

But the group managed to cut overall expenses to help boost earnings. Selling and marketing expenses declined by 1.2% y-o-y to $19.5 million, while general and administrative expenses fell 10.5% y-o-y to $16.9 million.

 

For now, more countries are easing their lockdown restrictions and analyst Juliana Cai believes that this should contribute to earnings improvement for Food Empire.

 

As Russia eased its restrictions, management highlighted that July and August sales have recovered to more than 90% of pre-Covid levels.

 

On the other hand, Kazakhstan and Vietnam have implemented another round of lockdowns to combat the resurgence of Covid-19 infections. 

Fortunately, the second round of lockdowns were not as strict as the first &ndash and this impact not expected to be worse than what it was in 2Q20.

 

&ldquo Although there could be short-term disruptions to sales &ndash from movement restrictions and supply chain challenges &ndash we do not expect consumer demand for Food Empire&rsquo s products to be severely impacted by Covid-19, due to its staple nature and low price points,&rdquo says Cai, who reckons that sales will normalise once the Covid-19 situation in markets plateau and consumers become used to the new normal.

Samantha Chiew  15/05/2020, 1:57pm

SINGAPORE (May 15): RHB Group Research&rsquo s analyst Juliana Cai is reiterating her &ldquo buy&rdquo recommendation on Food Empire with a target price of 75 cents from 88 cents previously.
On May 11, Food Empire released its business update, which saw net profit after tax fall some 13.3% to US$6.6 million from US$7.6 million, mainly due to foreign exchange losses as the Russian Rubble depreciated as a results from the oil crisis.
Excluding foreign exchange losses, core profit increased by 33% y-o-y US$9.5 million.
Revenue for 1Q20 increased by 5.0% to US$74.2 million, led higher contributions from the group&rsquo s markets in Ukraine, Kazakhstan and CIS South Asia and other markets. This was partially offset by a slightly lower contribution from Russia and Southeast Asia.
Due to the various lockdowns, the company&rsquo s Key Production, Sales and Distribution activities are still continuing but with some disruptions. It is also experiencing weaker offtake from stores in most markets, which is attributable to reduced customer footfall resulting from various forms of movement controls and/or safe distancing measures in these markets.
Food Empire also announced that its second coffee plant project in India, which was initially scheduled for completion and commercial production in middle of FY2020, will experience delays until international travel restrictions are lifted. Its first instant coffee plant has also experienced temporary disruption to production and faced intermittent logistics challenges.
Meanwhile, its The Non-Dairy Creamer, Snacks and Coffee packing facilities in Malaysia continue to operate with some supply chain delays being noted.
Apart from the foreign exchange losses, the company&rsquo s business was fairly stable in 1Q20. But Cai believes that 2Q20 will likely take a turn for the worse with various markets being in some form of lockdown while Russia and most of the CIS countries are seeing the full quarter impact of currency depreciation.
Sales volume in Russia and some of the CIS markets should be more severely impacted as footfall declined sharply for grocery retail. Vietnam, however, is not likely to be severely impacted due to the lower number of Covid-19 cases.
See: Food Empire records robust growth declares higher dividend on better outlook
&ldquo Our sensitivity test suggests that 5% depreciation of the RUB could lower earnings by about 15%, all else unchanged. To mitigate the negative FX impact, we note that Food Empire has implemented about 10% price increase in certain key markets and we expect to see the full impact of the price hike in 3Q20,&rdquo says Cai.
&ldquo In addition, the group is now shifting its focus to higher-margin sales rather than chase topline growth to ensure sustainable profitability. Given it is largely in the staple food business, we believe that full-year sales volume would remain resilient as a whole. We expect sales volume to pick up once the lockdown eases in 3Q20 for most cities,&rdquo she adds.
Nonetheless, revenue estimates for FY20-22 have been cut by 7%, 5% and 4%, respectively and core profit by 17%, 11% and 10%, respectively. This is due to the weaker currency and economic outlook in some of the company&rsquo s key markets. As at 12.45pm, shares in Food Empire are trading 2% higher at 50 cents or 0.9 times FY20 book with a dividend yield of 2.9%.

https://www.theedgesingapore.com/capital/brokers-calls/not-all-bleak-and-gloomy-food-empire