• Maintain BUY, and SGD1.75 TP, 66% upside and c.6.5% FY25F yield. We remain positive on Food Empire despite recent increase in coffee prices and earnings cut due to higher input costs. We like FEH for its strong balance sheet, cash generation ability, market share traction, valuation, and share buyback initiative. Growth continues to be driven by capacity expansion of its ingredients business. Our TP remains the same as we roll forward our 11x valuation from FY24F P/E to blended FY24-25F P/E.

• Higher coffee prices to dampen margins slightly. Since 2H23, coffee prices increased c.26% from USD179/lb to c.USD245/lb currently. As FEH’s main input is coffee, a sustained coffee price at current levels could see some pressure on margins going forward. When coffee prices reached as high as USD258/lb in FY22, we note that FEH’s gross margins were subdued at under 30%. Given that the coffee price increase rallied since 2H23, we anticipate slight margin pressure going forward. We reduce our gross margin assumption from 33.5% to 33% going forward – higher than previously given that it now has a stronger product portfolio vs FY22. That said, FEH is a brand company which can implement resizing (number of sachets) and repricing strategies to mitigate higher raw material prices. Our FY24-26F earnings is consequently lowered by 3% each.

• Marketing, brand building, and higher production to drive growth going forward. We see overall growth to be led by marketing and promotion strategies and brand building in the various markets. In addition, its Malaysia operation would have its new non-dairy creamer production capacity commencing sales from 2Q24, with management expecting it to reach full utilisation in the next 2-3 years. It is also constructing a new snack factory in Malaysia, which will contribute higher snack production capacity from 2025.

• 1Q24 revenue in line. 1Q24 revenue was USD118m (+14.5% YoY), within estimates. Growth was driven by the key segments of Russia, South East Asia, Ukraine, Kazakhstan, Commonwealth of Independent States (CIS), and South Asia. FEH’s largest market Russia saw 27.4% YoY revenue growth in local currency terms, but recorded just 3.2% YoY revenue growth to USD39m after translating into USD, as the Russian Ruble (RUB) depreciated 23.6% against the USD. Ukraine, Kazakhstan, and CIS segments grew 15.7% YoY to USD30m. South East Asia grew 35.3% YoY to USD30m as well. Overall, there were increased marketing and promotional activities, higher production volume growth from Malaysia and India manufacturing plants, and robust pricing strategy in key markets. Forecasts unchanged except for a lower GPM.

• 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 - 14 Jun 2024