Food Empire
Price target:
UOB Kay Hian “buy” $0.85 Retail recovery seen in core markets of Russia and Ukraine
UOB Kay Hian analyst Joohijit Kaur is keeping her “buy” call with a target price of 85 cents on instant coffee maker Food Empire as its key markets of Russia and Ukraine see recovery of retail sales.
In its latest 2QFY2020 results ended June, Food Empire’s revenue from its Russian sales fell by 20% y-o-y, due to stay-at-home measures implemented at the end of March. However, both the Russian and Ukrainian markets have been easing restrictions since June.
With the reopening of retail businesses in most regions, retail food sales in the Russian market has rebounded with the pace of decline narrowing to –2.2% y-o-y in July. Meanwhile, the retail turnover in Ukraine also bounced back in July, registering a y-o-y growth of 7.8% for the first month since April. This mirrors the management’s projections in 2QFY2020 that sales will slowly revert to pre-Covid-19 levels. “We are encouraged by the sequential recovery in these markets and our forecast accounts for a moderate 5.1% y-o-y decline in core earnings in 2H2020 compared with –24% y-o-y (excluding forex gain) in 2QFY2020,” Kaur writes in her Sept 24 report.
Furthermore, the company is mitigating the impact of the volatile Russian Rouble by implementing an average selling price (ASP) hike in April. With the price hike being carried out in stages, the analyst reckons that this will only be more apparent in the group’s 3QFY2020 results, as compared to 2QFY2020.
“Given the consumer staple nature of its products, low price point and its market leading position, demand for its products is relatively price inelastic and is fairly resilient in the face of an economic slowdown, in our view,” adds Kaur.
The stock is trading at an attractive valuation of 8.6 times FY2021 P/E, a significant discount to peer average of 20 times FY2021 P/E. This is despite its market leader position in its core markets in Eastern Europe and growing presence in Vietnam. —Samantha Chiew