Brokers' take: RHB lowers target price for Food Empire on rising costs

RHB lowered its target price for Food Empire F03 to S$1.01 from S$1.13 previously, citing potentially higher operating costs which are likely to result in a temporary dip in group margins until Q1 of FY2022. The new target price factors in a 11 per cent lower estimate for the group's FY2022 PATMI (profit after tax and minority interests), and is based on 15 times price-to-earnings.

RHB has nonetheless maintained its "buy" call on the stock with expectations of continued robust revenue and a rebound in margins for the full financial year ahead. In a research note on Monday (Jan 10), analyst Jarick Seet noted a dip in the group's recent Q3 FY2021 gross margin, and said he believes profitability for the full financial year of 2021 will likely suffer as a one-off occurrence mainly due to Covid-19.

This comes as he expects inflationary pressure on commodity and packaging costs, as well as rising ocean freight rates, will continue to crimp the instant coffee manufacturer's group margins until Q1 of FY2022.

The analyst is however expecting a strong turnaround in profitability in FY2022 after margins normalise in H1.

"This is because freight and commodity costs should normalise once the Covid-19 situation improves around the globe - governments around the world are already implementing measures to regard Covid-19 as an endemic," he said.

At present, Food Empire's management will be raising the average selling price of their consumer products in several stages to improve margins, he added.

Seet also believes Food Empire's revenue growth is still "robust" with its Q3 FY2021 revenue growing 8.8 per cent year on year.

This comes on the back of strong growth in its core Russia market and South Asia market, as the group saw higher sales volumes from its non-dairy creamer plant and snacks manufacturing facility, as well as the commencement of a new freeze-dried coffee plant in India.

In addition, the analyst pointed out that Food Empire's management has been actively buying back its shares as the company is "deeply undervalued". In his view, this is a vote of confidence by management on the group's prospects, and that FY2022 would bring a "turning point" for the group.

"We remain confident on Food Empire's prospects, and believe that it remains an attractive target for privatisation or a takeover, due to its attractive valuation," Seet added.

The new target price represents a potential upside of 32 per cent with a dividend yield of about 2 per cent from the counter's unchanged trading price of S$0.765, as at 1.40 pm on Monday.

READ MORE:

• Food Empire's net profit halved to US$3.1m in Q3 on higher commodity, freight costs
• Food Empire perks up for instant (coffee) success