• Maintain BUY, new SGD1.36 TP from SGD1.52, 41% upside and c.5% FY25F yield. We continue to like Food Empire for its strong balance sheet, cash generation ability, market share traction, valuation, and growth led by capacity expansion. We cut our FY24F-26F earnings by 11%, 9%, and 9% (on a weaker-than-expected 1H24) to factor in lower gross margins due short- term pricing challenges in Russia and reduce our 10x blended FY24F-25F P/E-based TP.

• Expect more production facilities to drive growth. We see growth over the next few years driven by higher production capacity. FEH has already expanded its Malaysian non-dairy creamer production capacity and is planning for a second snack factory by 1H25. In Kazakhstan, the company is constructing its first coffee mix facility, with production is scheduled to commence in 2025. There are also preliminary plans to establish another Vietnam instant coffee factory. The USD40m funding from Ikhlas Capital will come in handy to help in its expansion in ASEAN, in our view.

• 1H24 below. Revenue of SGD225m (+13.6% YoY) was in line with our estimates. However, earnings of SGD23m (-11% YoY) were below our expectations. Revenue was driven by Ukraine, Kazakhstan, and Commonwealth of Independent States (CIS) operations, which grew 16% YoY to USD57m. South-East Asia and South Asia operations grew by 35% and 36% to USD62m and USD30m. These were led by brand investments and promotions. Russian operations’ revenue declined by 4% YoY to USD68m due to the depreciation of the RUB despite achieving 13% YoY revenue growth in local currency terms. Gross profit margin stood at 30% (-5ppts) on short-term price disruption in Russia, which saw price disruptions and challenges in passing on higher prices to customers while input costs were elevated. Otherwise, opex was in line with expectations. As a result of the lower gross margin, EBIT missed expectations and declined by 18% YoY to USD29m, with EBIT margins lower at 12.6% (-4.8ppts).

• FY24F-26F earnings reduced by 11%, 9%, and 9%. 1H24’s overall performance was dragged by lower gross margins due pricing challenges in Russia, which otherwise would be satisfactory. Even the decline in the RUB has been compensated by decent growth in other segments. We believe it may take another quarter for pricing challenges in Russia to ease and, as such, we impute lower gross margins in our forecasts. Our FY24F-26F earnings are consequently reduced by 11%, 9%, and 9%.

• 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 other CIS countries’ 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 - 3 Sep 2024