Brokers’ take: UOBKH downgrades Food Empire to ‘hold’ on narrowing margins

UOB Kay Hian (UOBKH) has downgraded its call on food and beverage company Food Empire to “hold” from “buy”, and reduced its target price to S$1 from S$1.30.

This comes as the research house believes that the price hikes and price disruptions for coffee beans triggered by the Russia-Ukraine war would continue to lower the company’s margins.

Analysts John Cheong and Heidi Mo on Wednesday (Sep 4) said Food Empire will need time to stabilise prices to maintain revenue and margins, before it can raise prices in the Russian market.

They expect the company’s gross margins from 2024 to 2026 to remain muted at 29 to 30 per cent.

The analysts also shaved their dividend forecast for Food Empire to S$0.05 per share, from S$0.10 per share.

This followed the company’s first-half financials released on Aug 12, when it posted an 11.3 per cent year-on-year drop in net profit to US$23.6 million.

The decline, which was in line with UOBKH’s expectations, was a result of lower profit contributions from its Russian market.

Revenue generated from this market fell 3.6 per cent in H1 ended Jun 30, mainly due to the depreciation of the Russian rouble against the US dollar (USD), and excess stock levels.

This currency devaluation, along with high inventory levels, is expected to weigh on Food Empire’s near-term performance, because customers will take time to deplete their stockpile, said Cheong and Mo.

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They added: “Exchange rate volatility may continue to negatively affect revenue, particularly from Russia, as the rouble/USD rate continues to remain weak at 90.9 across July to August 2024.”

The analysts added that the new target of S$1 is pegged to 8.7 times the FY2024 price-to-earnings estimates, at 0.5 standard deviation below the long-term historical mean.

Given Food Empire’s plans to expand its manufacturing footprint, both Cheong and Mo continue to like the stock as they are positive on its growth prospects in South-east Asia and South Asia.

Citing Allied Market Research, they noted that South-east Asia is projected to clock a compound annual growth rate (CAGR) of 3.7 per cent to US$6 billion by 2029. South Asia is expected to grow 6.7 per cent CAGR to reach US$900 million in the same year.

“Given Food Empire’s growing market presence in these markets, we think that it is well-positioned to meet the rising global demand for instant coffee,” they said.

Shares of Food Empire were trading down 0.5 per cent or S$0.005 at S$0.97 as at 10.30 am on Friday.