• Food Empire (SGX:F03) reported strong 1Q22 numbers, with revenue growing 7.6% y-o-y to US$82.6m and NPAT up 34.4% y-o-y to US$9.17m despite a one-off US$3.2m FX loss and the Russia-Ukraine war dampening some segmental numbers.
• Demand in its markets remained firm, while that of South Asia and some other areas grew solidly. We have confidence in the resilience of Food Empire’s business, and believe this consumer staples counter offers investors a sweet bargain – it is trading at just 7.2x FY22F P/E.

Demand Remains Strong Despite Ongoing Conflict

• Demand from its Russia and Ukraine, Kazakhstan (all comprising a single segment) and Commonwealth of Independent States (CIS) markets remains firm, with revenue only declining 5.5% and 5.8% y-o-y. This was partly due to a refocus of marketing efforts by management, to increase its attention on the South Asia and other markets, as a result of the Russia-Ukraine conflict.
• That said, we believe that Food Empire’s business continues to be resilient in its core markets – the demand for instant mix coffee remains sturdy, even with an ongoing war.
• In fact, it gives Food Empire an advantage, as foreign competitors are leaving such markets – which would benefit the players that stayed. These include Food Empire, which has the largest share of these markets.

Other Markets Account for 47.8% of Total Revenue

• The South-East Asia, South Asia and other markets continued to record strong growth – especially in South Asia, where its revenue grew 233.1% y-o-y, and others (which reported a 41.9% y-o-y surge in revenue). This was mainly due to the strong contribution from the group’s freeze-dried coffee plant in India which commenced operations in 2Q21, and the strong rebound in demand from Vietnam due to its economic reopening.
• As of 1Q22, other markets already account for 47.8% of the group’s total revenue – which further signifies that Food Empire’s business has diversified well beyond just Russia and Ukraine.

The Stock Is Trading at Oversold Levels Due to Fear, Misunderstanding and Uncertainty

• We believe that Food Empire’s 1Q22 results should quash any doubts over the strength and diversification of its business. We expect it to continue doing well, despite the Russia-Ukraine war – with a recovery in margins being imminent. This, in turn, should be due to several initiatives undertaken previously, like raising prices to pass on the increase in freight and raw material costs.
• We upgrade our FY22F earnings forecast for Food Empire by 10% but lower our P/E to 13x from 15x to factor in the ongoing Russia-Ukraine conflict.

Food Empire - ESG

• Using our in-house proprietary methodology, we derive an ESG score of 3.0 for Food Empire, which is on par with the country median. As a result, we apply a 0% discount or premium to our target price.
• Reiterate BUY call on Food Empire with new S$0.95 target price from S$0.93, with ~4% FY22F yield.

Source: RHB Invest Research - 19 May 2022