SINGAPORE companies have been mostly coy when asked about their exposure to Russia and Ukraine but the results announcement by Food Empire on Thursday (Feb 24) gave a glimpse of what they are facing.

 

" Although the current raft of sanctions are unlikely to have a direct or immediate impact on business prospects in the Ukraine and Russia markets, it will have an adverse impact on the volatility of the exchange rates of the Russian ruble and Ukrainian hryvnia.

 

" This will further exert inflationary pressure on commodities prices and energy costs," said the food and beverage manufacturer.

 

Food Empire had seen improvements in the sales and demand for its products for the financial year ended December 2021, but the group' s performance had been overshadowed by the tension between Russia and Ukraine.

 

Russia' s invasion of Ukraine on Thursday has seen the US and its allies imposing economic sanctions on Russia.

 

" While details of prospective sanctions remain unclear, such new developments will compound the challenges faced by the group and present a more difficult operating environment going forward," it said, adding that " it is closely monitoring the fluid situation and will do its best to manage" .

 

Food Empire remains confident that its local manufacturing facilities across all its markets including Russia and Ukraine will be able meet the demands of consumers.

 

Food Empire posted a 27.2 per cent dip in net profit to US$19.5 million, due to due to lower margins as a result of higher commodity costs and ocean freight rates.

 

Higher depreciation expenses were also incurred from its new freeze dry coffee plant in India.

 

Earnings per share for the full year came in at 3.64 US cents versus 5.01 US cents a year earlier.

 

Revenue for the full year rose 17.5 per cent to US$320.6 million as contributions from Russia - its largest market - rose amid easing pandemic restrictions. Revenue from Russia grew 15.4 per cent to US$114.9 million.

 

" The resilient performance in Russia was achieved in spite of challenging environment including the ongoing pandemic, geo-political tensions and currency devaluation," said Food Empire. For the group' s Ukraine, Kazakhstan and CIS (Commonwealth of Independent States) markets, revenue rose 5.7 per cent to US$71.7 million.

 

Food Empire' s South-east Asia, South Asia and other markets also recorded higher revenues, advancing 19.5 per cent, 140.8 per cent and 14.3 per cent respectively.

 

Food Empire said that it is expecting businesses in Vietnam and Malaysia to improve as lockdown measures ease. Meanwhile demand for the group' s newly commissioned freeze dry coffee plant in India has shown strong growth and is expected to reach optimal production capacity.

 

The company recommended a first and final dividend of 1.62 Singapore cents a share, lower than the 2.2 cents for 2020. A 0.58 cent a share special dividend for FY2021 was also proposed. Shares of Food Empire ended Thursday at S$0.58, down S$0.035 or 5.7 per cent.

RHB lowered its target price for Food Empire 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 an 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 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 trading price, which closed flat at S$0.765 on Monday.

 

RECORD high ocean freight rates and higher commodity costs have eaten into the profits of instant food and beverage manufacturer Food Empire, despite registering higher revenue for the third quarter ended September.

 

Despite an 8.8 per cent increase in revenue to US$76.4 million, the group' s net profit after tax fell 50.6 per cent to US$3.1 million in Q3, from US$6.3 million in the year-ago period.

 

This brings net profit after tax to US$14.6 million for the first 9 months of FY2021, down 25.2 per cent from US$19.5 million in the corresponding period a year ago.

 

In a quarterly update on Tuesday (Nov 9), Food Empire said the decline in Q3 was mainly due to lower profit margins due to commodity and freight costs, partially mitigated by lower foregin exchange loss.

 

In addition, the group said it is also facing supply chain delays due to a shortage of shipping container slots and port congestion.

 

For the 3-month period, gross profit margin fell 12 percentage points to 25.7 per cent, while net profit margin dropped 4.9 percentage points to 4.0 per cent.

 

Gross profit for the quarter was 26 per cent lower at US$19.6 million, compared to US$26.5 million a year ago.

 

Food Empire said that the situation currently remains fluid in Russia and Ukraine, which had recently witnessed new waves of Covid-19 infections after a few months of gradual recovery. It added that Russia, the group' s largest market, had recently imposed a " short lockdown" to curb the spread of the virus as daily infection rates spiked.

 

Meanwhile, in Vietnam - the group' s second-largest market - Food Empire said growth in Q3 had been impeded by a surge in Covid-19 infections during the quarter.

 

The group said it remains optimistic of its longer-term prospects, and expects to be able to fulfil its near-term obligations, meet its debt covenants and service its debt obligations.

 

RHB Group Research analyst Jarick Seet has maintained &ldquo overweight&rdquo on the small and mid-cap sectors in Singapore.

Within the sector, Seet has identified his top picks as Food Empire, HRnetGroup, Marco Polo Marine and Frencken.

On Food Empire, Seet deems the current rising costs as just &ldquo temporary&rdquo and that the costs should taper down in FY2022.

 

Food Empire has also increased its prices to mitigate the cost hike, which should sustain margins in the 4QFY2021.

That said, Seet believes that FY2022&rsquo s results will better reflect Food Empire&rsquo s potential with expectations of a strong rebound in earnings.

 

HRnetGroup is seen as a proxy for the global recruitment recovery, as hiring activities are pegged to ramp up in the next few quarters.

&ldquo We expect professional and flexible staffing to rebound strongly in FY2021. As such, the company should record a solid performance in FY2021,&rdquo Seet writes.

Marco Polo Marine&rsquo s revenue for the 9MFY2021 ended September has already exceeded its revenue for the FY2020. This, says Seet, is driven by strong growth in both its ship chartering as well as repair activities.

 

&ldquo Average utilisation and charter rates have already recovered to above pre-Covid-19 levels, and we remain confident about a turnaround to profitability by the end of FY2021,&rdquo he writes.

 

&ldquo We do expect this company to secure more contracts in the renewable energy sector (which it is pivoting towards), and believe it will also likely benefit from the increase in oil prices &ndash which may lead to more activities in this sector,&rdquo he adds.

Amid the recovery in the economy, as well as the resumption in global travel, Seet expects consumer spending to rebound.

As such, he prefers counters that are currently trading at attractive valuations, as he anticipates fund inflows into the sector.

While not his top picks, Seet has indicated his preference for Kimly as well as UnUsUaL. With the latter, Seet estimates that its numbers should pick up when events return to Singapore.

 

Finally, Seet says semiconductor stocks are still viewed positively despite the recent pullback.

&ldquo Technology stocks have performed quite well in general, and the sector&rsquo s outperformance will likely continue, given the lack of chips as well as some parts across the supply chain,&rdquo he says.

&ldquo About 29 new fabrication facilities (fabs) have been planned for construction in the next few years, which should ensure high demand for equipment,&rdquo he adds.

As such, he remains upbeat on semiconductor supply chain beneficiaries such as Frencken.

 

On the counter, Seet estimates Frencken&rsquo s new acquisition will see revenue contributions grow over the next few years from a semiconductor customer that is a major player in the US, but has operations in Singapore.

UOB Kay Hian analysts John Cheong and Clement Ho have kept &ldquo buy&rdquo on Food Empire Holdings with an unchanged target price of $1.30 in a Sept 2 report.

 

The estimate comes as the company reported net profit of US$11.5 million ($15.2 million) in the 1HFY2021 ended June on Aug 13.

The figure stood below the analysts&rsquo expectations at 37% of their FY2021 estimates due to margin pressures on high commodity prices and record-high ocean freight rates.

 

That said, the company saw revenue growth across all of its markets, especially two of its largest markets, Russia and Southeast Asia.

 

Moving forward, Food Empire Holdings should be able to pass on the increased costs of raw materials and logistics gradually due to its strong branding power and market-leading position.

 

To the analysts, Food Empire Holdings has a compelling valuation as it is currently trading at 10 times FY2022 price-to-earnings (P/E) compared to its peers&rsquo average of 18 times.

 

&ldquo In view of its resilient core earnings amid a challenging environment, leading position in its core markets in Eastern Europe and growing presence in its second largest market, Vietnam, we believe the valuation gap with its peers will narrow,&rdquo they write.

On the back of higher raw material and logistics costs however, Cheong and Ho have lowered their earnings forecast for the FY2021 by 20%.

 

They have also reduced their gross margin forecast by 2.2 percentage points to 36.1%.

 

That said, the situation is &ldquo temporary in nature,&rdquo they note, which is why they have reduced their earnings estimates for the FY2022 and FY2023 by 6% after lowering their gross margin assumption by 1 percentage point to 38%.

Shares in Food Empire closed flat at 78 cents on Sept 7, with an FY21 P/B of 1.3 times and a dividend yield of 2.4%.