• Maintain BUY, new SGD1.75 TP from SGD1.53, 22% upside and c.4% FY24F yield. Our outlook for Food Empire has become more positive after it posted strong core earnings for FY23. Based on its current sales traction and strategy, we believe FEH should see stronger demand growth ahead. As such, we raise our estimated sales growth by 4-6% and earnings growth by 5-7%, premised on better market penetration and margins. Following the upgrade in our forecasts, we peg the stock to 11x FY24F P/E (vs 10x previously).

• FY23F earnings in line. Earnings of USD57m (+14% YoY) and revenue of USD426m (+7% YoY) are in line with our estimates. Revenue was driven by the Ukraine, Kazakhstan, Commonwealth of Independent States (CIS) (USD111m, +21% YoY), South Asia (USD49m, +24% YoY), and South-East Asia (USD102m, +10% YoY) markets. Although revenue (in USD terms) from Russia – FEH’s largest market – dropped by 3.5% YoY (USD143m), sales in local terms grew, despite the depreciation of the RUB vs the USD. All core markets recorded sales growth in local currency terms, led by higher sales volumes and an increase in selling prices. Its GPM improved by 3.4ppt YoY to 33.2% as FEH sold higher-margin items. EBIT and EBIT margin were in line with our estimate, at SGD71m and 17%. As a result of both sales and GPM growth, the group’s core net profit for FY23 expanded by 24% YoY. FEH declared a final and special DPS of 5 SG cents (each), bringing total DPS for the year to 10 SG cents, reflecting a dividend payout ratio of close to 70%.

• Outlook remains robust. We see growth continuing to come from pure coffee categories such as the coffee mix range in the Russia, Ukraine and CIS markets. Key markets such as Russia also give FEH scope to increase its penetration via more locations and marketing channels. Modern trade in Russia continues to grow, and large store chains taking over smaller shops offer more opportunities to grow channel sales. It is also targeting smaller segments and markets such as the tea segment in Kazakhstan, and freeze- dried pure coffee products in Russia, Ukraine and CIS nations. In Vietnam, FEH will continue to improve its market penetration with its coffee mix and iced coffee products. On the manufacturing side, its production plant in India is currently running at full capacity, while its new non-dairy creamer facility in Malaysia will be commencing production soon. We raise FY24-25F earnings by 5-7%, premised on a more robust outlook for the group. Our higher revenue growth forecast of 4-6% accounts for stronger revenue traction in the Russia, Ukraine and CIS and Vietnam markets. Our margins assumptions are largely unchanged, as FEH should be able to defend its margins by adjusting prices.

• Downside risks to our forecasts include a disruption in operations due to the Russia-Ukraine conflict, and the negative effect of a change in the value of the RUB and CIS’ currencies. As FEH’s ESG score is 3.0 (country median: 3.1), we apply a 2% discount to its intrinsic value to derive our TP.

Source: RHB Research - 4 Mar 2024