Brokers’ take: CGS-CIMB starts coverage on Food Empire at ‘add’ with S$1.69 target
Michelle Zhu
CGS-CIMB has started coverage on Food Empire with an “add” rating, which is premised on the food and beverage manufacturer’s growth and dividend prospects, as well as cheap valuations.
Its S$1.69 price target implies an 11.2 times price-to-earnings ratio based on FY2025 estimates, representing one standard deviation above the stock’s five-year average of 8.2 times.
The research house forecasts an earnings per share compound annual growth rate of 7 per cent from FY2022 to FY2025, and a dividend yield of 3.9 per cent over FY2023 to FY2025.
In an initiation report on Tuesday (Oct 3), CGS-CIMB analysts highlighted Food Empire as an “undervalued consumer staple company” that is trading significantly below its peer average.
“In our view, this is due to concerns over its revenue exposure to Russia and Ukraine, which has been in an armed conflict since February 2022. However, as 3-in-1 beverages are consumer staples and are priced for the mass market, the major fundamental impact on Food Empire has been foreign exchange rate movements.”
Highlighting Food Empire as a market leader in Russia, the analysts see room for the group to grow its business further in Vietnam and possibly expand into nearby markets such as Cambodia.
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They also like the stock for its recent diversification into the food ingredients business, which they observed to have produced cost savings for the group, and in the process, improved its profit margins. Shareholders of Food Empire further stand to benefit from the group’s excess cash, dividend track record and its management’s continued share buybacks, added the analysts.
This comes especially as Food Empire nears the completion of its non-dairy creamer plant expansion in Malaysia to mark the end of its capital expenditure cycle, with the group in a net cash and positive free cash flow position as at end-June 2023.
Despite the possibility of a new plant being built in Kazakhstan, the analysts think the resultant capex would not affect the group’s ability to share excess cash with its shareholders.
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“In our view, the Kazakhstan plant, if Food Empire decides to proceed, is likely to be of a manageable magnitude and Food Empire will continue to be able to return excess cash to shareholders via dividends and continued share buybacks.”
Shares of Food Empire were trading S$0.01 or 0.9 per cent higher at S$1.11 as at 9.21 am on Wednesday.
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