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Broker's take: UOB Kay Hian initiates coverage on Food Empire with 'buy', S$0.89 target price

foodempire-founderTanWangCheow-SGX.jpg
Tan Wang Cheow, founder of Food Empire. The company's iced coffee mix product, Café Pho, is a top three player by value in Vietnam's 3-in-1 coffee mix market.

UOB Kay Hian has initiated coverage on Food Empire Holdings, a manufacturer of instant coffee and snacks, with a "buy" call and a target price of S$0.89, citing that shares were trading at a "huge bargain" given its global footprint.

As at 3.55pm on Wednesday, Food Empire was up one Singapore cent or 1.5 per cent at 67 cents, a 25 per cent discount from UOB's price target.

At Tuesday's closing price of S$0.66, Food Empire shares were 9.2 times its FY2020 forward price-to-earnings, which is an "attractive" valuation considering its peers are trading at an average of 22 times, UOB Kay Hian analysts Joohijit Kaur and Clement Ho.

"We attribute this to the lack of street coverage," they wrote, before adding that the firm's visibility should improve due to a wider core earnings base, reduced geographical dependency and its operational leverage being at a tipping point.

MacCoffee, Food Empire's flagship 3-in-1 coffee mix brand, is a market leader in countries within the Commonwealth of Independent States. "With its strong brand equity and broad network of distributors, it commands the largest market share of Russia’s coffee mix market," the analysts said.

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Before the Russian rouble collapsed in 2014, Russia had contributed to 60 per cent of Food Empire's revenue. But that has since fallen to 40 per cent, mainly due to the coffee maker deepening its presence in other geographical regions such as Indochina, which includes Vietnam.

Café Pho, Food Empire's iced coffee mix product, is among the top five brands by volume share and a top three player by value in Vietnam's 3-in-1 coffee mix market, the analysts wrote.

Revenue from Indochina grew almost four times to US$50.4 million in 2018, from US$10.5 million in 2014. Vietnam is the company's second largest market, contributing almost 18 per cent to its topline.

"We believe Food Empire will be able to continue to gain market share through the introduction of new products, leveraging on its extensive network of distributors and sales representatives in Vietnam," Ms Kaur and Mr Ho noted.

With Food Empire due to report FY2019 earnings later this month, the analysts expect a record year. They forecast the company's compound annual growth rate for FY2019-2021 to be 9.4 per cent.

In November 2019, Food Empire posted a Q3 net profit of US$7.9 million, up 34.4 per cent from the same period a year earlier on sales growth in Russia, Ukraine and Indochina.

UOB Kay Hian's report is prepared under the Research Talent Development Grant Scheme where the Monetary Authority of Singapore provides co-funding to groom research talent to initiate research coverage primarily of mid to small cap Singapore-listed companies.

Other research houses covering Food Empire include RHB Securities, which has a "buy" recommendation and target price of S$0.83.

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