• Keep BUY and SGD1.39 TP, 35% upside and c.5% yield. Since our last update in March, Food Empire’s share price has surged c.18% from SGD0.87 to SGD1.03, defying the wider market, including the STI Index. 1Q23 results continued to show resilience in demand and earnings growth. Despite recent political developments in Russia, we do not see a significant decline in demand for FEH’s food products. We see growth going forward, led by Russia and Ukraine, Kazakhstan and the Commonwealth of Independent States (CIS) countries, as well as Vietnam.

• 1Q23 earnings on track. Revenue and earnings of USD103m (+24% YoY) and SGD14m (+51% YoY) were within expectations. Sales growth was strong due to the low base from the geopolitical conflict in 1Q22. Otherwise, demand for its branded products remained robust. Revenue growth was largely driven by Russia (+44% YoY, USD38m) and Ukraine, as well as Kazakhstan and CIS countries (+52% YoY, USD26m). South-East Asia sales declined 10% YoY to USD22m due to lower utilisation of the non-dairy creamer factory in Malaysia and post COVID-19 sales normalisation in Vietnam. Gross margin expanded 4.7ppts to 35.6%, while EBITDA margin reached 21.1% (+5ppts) on better leverage and economies of scale. We expect 2Q23 earnings to trend in line with our estimates.

• More brand investment activities to drive growth. We remain positive on FEH’s growth prospects, with growth driven by key markets of Russia, Ukraine, Kazakhstan and CIS segments, as well as in the South-East Asia segment. We do not see significant decline in demand for FEH’s food products in Russia despite its recent political developments. We believe food products will continue to be well distributed and sold in these markets despite the conflict. The Russia, Ukraine, Kazakhstan, and CIS segments should continue to perform well, especially with the ongoing brand investment to win market share. The South-East Asia segment (FEH’s third- largest segment) will see growth contributed by Vietnam and non-dairy creamer production. Post COVID-19 normalisation, Vietnam (largest contributor to the South-East Asia segment) will see increased advertising and promotional activities to drive growth. Demand for the FEH’s potato chips products remains strong with continued interest from private label customers. The expansion of the group’s non-dairy creamer factory is ongoing, and the added capacity is expected to commence commercial production in 4Q23.

• Downside risks to our forecasts include a disruption of operations due to the Russia-Ukraine conflict, and currency swings in the RUB and other CIS countries' currencies.

• ESG. As FEH’s ESG score is 3.0 out of 4.0 – on par with our country median – we applied a 0% discount/premium to its intrinsic value to derive our TP.

Source: RHB Research - 5 Jul 2023