• Food Empire (SGX:F03)’s 1H22 PATMI surged 134.4% y-o-y to US$27m, while revenue grew by 18.5% y-o-y to US$177.4m despite the ongoing Russian-Ukraine conflict. This proves its doubters wrong, and validates its diversified revenue streams and resilient business model.
• We raise our FY22F PATMI forecast for Food Empire by 30%, but lower our pegged target price P/E to 10x from 13x to account for the risk of the current Russia-Ukraine conflict.
• Reiterate BUY recommendation on Food Empire with unchanged target price of S$0.95 offers 70% upside with ~5% FY22F yield.

Revenue Growth Across All Geographical Markets

• Despite the ongoing conflict between Russia and Ukraine, demand from its Russia and Ukraine, Kazakhstan (all comprising a single segment) and Commonwealth of Independent States (CIS) markets remains firm, with revenue still rising by 4.8% and 17.2% y-o-y. In addition, revenue from South Asia continued to show solid growth, and rose 221.3% y-o-y to US$18.9m.
• Food Empire has managed to diversify its revenue stream from Russia over the years, and revenue from other markets is now more than 50% of the total revenue (as of 1H22) – even while it continues to see growth from its Russian market.
• That said, we believe that Food Empire’s business will remain 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 remaining players. These include Food Empire, which has the largest share of these markets

Margins Have Stabilised and Revenue Growth Will be Next

• Food Empire's core net profit margin (NPM) improved to 11.2% in 1H22, from 8% in 1H11, after raising the prices of its products and mitigating actions taken to counter the rise in raw material as well as freight costs.
• Management is happy with the NPM being around 10% levels, and will likely intensify marketing efforts to target revenue growth in specific markets going forward.

Way Too Cheap at Current Levels

• We believe that Food Empire’s 1H22 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. The asset sale of its current industrial property (S$49.25m) should also boost its balance sheet and cash position.
• In addition, management will start to buy back shares with the excess cash, once the asset sale is completed.
• We believe Food Empire is a steal at these levels – Food Empire's Share Price is trading at just 6x FY22F P/E – and reiterate our BUY call. Our target price for Food Empire is now pegged to a conservative 10x, from 13x FY22F P/E, to account for operational risks in Russia.

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.

Source: RHB Invest Research - 15 Aug 2022