• Keep BUY and SGD1.39 TP, 30% upside and c.5% FY24F yield. We continue to like Food Empire for its growth prospects – driven by key markets Russia, Ukraine, Kazakhstan, Commonwealth of Independent States (CIS), and South-East Asia. Valuations are undemanding at <8x FY24F P/E, ie -0.5SD of its historical mean. Our TP is based on 10x blended FY23F-24F yields and 30% upside.

• Positive on Vietnam. We recently visited FEH’s Vietnam operations and came away positive on the market’s outlook and growth prospects. The company’s operations there stand to benefit from strong demographics and economic growth potential, with a population of c.100m people (where c.50% are below 35), and a 2024F GDP growth is 6.4%. Vietnam is currently a significant contributor to FEH’s South-East Asian revenue, where it has built a market presence for over 10 years – establishing itself as the third-largest 3-in-1 instant coffee player. The key strategies ahead: Move into product variants and penetrate further with the Café Phó brand.

• 1H23 earnings on track. Revenue and earnings of SGD198m (+12% YoY) and SGD27m (-1.5% YoY) were in line with our forecasts. Topline growth was driven largely by Russia, Ukraine, Kazakhstan, and CIS countries (+22% YoY). South-East Asia’s revenue was flattish (+0.4% YoY; SGD46m), with South Asia’s revenue growing slightly at 2.9% YoY (SGD22m). Operating profit grew 68% YoY on gross margin expansion (+5.5ppts) to 34.7% due to better pricing. Earnings slightly declined from 1H22 on FX impact. Otherwise, core operations remained healthy. We maintain our TP and earnings forecasts, as 1H23’s performance was on track.

• As mentioned above, FEH’s growth drivers stem from Russia and its neighbouring markets – ie Ukraine, Kazakhstan, and the CIS member states – as well as Vietnam, and growth continues to be driven by these markets. Despite the conflict in Ukraine, the company’s factory there remains operational – it also continues to supply food products to Russia. Growth in the latter has been positive over the past few quarters, driving overall revenue and earnings. This was mainly due to brand building, brand investment, and marketing & promotion exercises conducted within this market. We are positive on Vietnam as well – it is a key contributor to South- East Asian sales. FEH’s strategy to strengthen its market share with new product variants and further market penetration of its mainstay coffee product (Café Phó) should bode well and support future growth going forward.

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

Source: RHB Research - 06 Sep 2023