RHB Research is upbeat on Food Empire : F03 +0.57%&rsquo s earnings prospects for FY2023 after the food and beverage manufacturer&rsquo s latest set of full-year financial results surprised on the upside, driven by strong revenue growth in Russia and Ukraine.

 

The brokerage maintains its &ldquo buy&rdquo call, while raising its price target to S$1.39 from S$0.95, to reflect an estimated FY2023 dividend yield of 5.8 per cent.

 

Analyst Alfie Yeo on Thursday (Mar 16) said this dividend should be supported by the group&rsquo s strong operating cash flow of over US$70 million, with about US$90 million in net cash.

 

In Yeo&rsquo s view, the stock trades at a &ldquo compelling&rdquo six times price-to-earnings multiple based on FY2023 estimates, which is one standard deviation from its mean of nine times. The higher price target is based on a multiple of 10 times.

 

The group&rsquo s FY2023 to FY2024 core earnings projections have been lifted by 33 to 35 per cent on a higher FY2022 base. Revenue estimates for the period were also raised by 8 to 13 per cent.

 

Yeo also foresees more efficient operating expenditure and higher operating margins for the group at its current run-rate &ndash an estimate of a company&rsquo s earnings based on reported data &ndash which he believes is &ldquo sustainable, premised on better leverage and economies of scale in Russia&rdquo .

 

According to the analyst, Food Empire&rsquo s outlook remains stable for its key markets in Russia and Ukraine as their retail channels and supply chains remain unaffected amid geopolitical tensions.

 

&ldquo As a brand owner, Food Empire was able to sustain its profitability better than distributors and retailers, especially in Russia and Ukraine,&rdquo he said of the group&rsquo s FY2022 financials.

 

Analysts from UOB Kay Hian have reiterated their &ldquo buy&rdquo call for Food Empire F03 0.58%   with a 64% increased target price of $1.28 from 78 cents previously, after the company posted earnings of US$33.0 million ($44.6 million) for the 2HFY2022 ended Dec 31, 2022, 4.2 times higher than its earnings of US$8.0 million for the year earlier period.

 

Maybank Securities analysts have also maintained their &ldquo buy&rdquo rating with a higher target price of $1.29 from $1.20 previously.

 

In their report dated March 1, John Cheong and Heidi Mo of UOB Kay Hian note that Food Empire reported net profit of US$60.1 million for 2022, pulling off a new record high. Excluding a one-off gain of US$15 million from the disposal of non-core assets, the company&rsquo s core net profit increased 133.7% y-o-y to US$45.1 million, outperforming their expectations and forming 125% of the analysts&rsquo estimates.

 

The group has thus proposed a record first and final dividend of 4.4 cents per share for FY2022, double that of FY2021&rsquo s dividend payout of 2.2 cents per share, which translates to a dividend yield of 5.5%.

 

They have attributed Food Empire&rsquo s strong performance to cost controls, higher revenue and improved profitability from most segments, which mitigated lower sales from the Southeast Asia market. &ldquo Its largest market, Russia, reported revenue growth of 29.1% to $148.4 million, mainly due to strong consumer demand, the appreciation of the Russian ruble against the US dollar, and higher average selling price (ASP),&rdquo say Cheong and Mo.

 

&ldquo Similarly, despite fluctuating currencies from geopolitical uncertainties, its Ukraine, Kazakhstan and Commonwealth of Independent States (CIS) segments achieved a 28.6% y-o-y revenue growth,&rdquo they add.

 

However, the analysts note that revenue from the Southeast Asia segment fell 4.2% to US$92.7 million, attributable to post-pandemic normalisation in Vietnam, but partially offset by improved contributions from Malaysia&rsquo s non-dairy creamer and snacks manufacturing facilities.

 

In FY2022, selling and marketing expenses fell by 17.2% y-o-y due to lower advertising and promotion expenses, but were partially offset by higher manpower costs, as seen by the 11.6% y-o-y increase in administrative expenses. With that, core net profit margin expanded a &ldquo substantial&rdquo 5.3 percentage points to 11.3% in 2022, indicating the group&rsquo s successful cost-control measures and optimised operations, they say. &ldquo In our view, the results are a testament to the group&rsquo s strong brand equity, and earnings growth will continue as demand in all markets remains strong.&rdquo

 

The UOB Kay Hian analysts have raised their FY2023 and FY2024 core earnings forecasts by 33% and 41% respectively to $48 million and $52 million, up from $36 million and $33 million, while adding their estimates for FY2025. &ldquo These figures reflect the better-than-expected core earnings for FY2022 and improving net margins,&rdquo they say.

 

Their price-to-earnings ratio (P/E) based target price has been raised by 64% to $1.28 as their P/E peg has increased to 10.5x FY2023 earnings per share (EPS) &mdash Food Empire&rsquo s long-term historical mean &mdash to reflect the improved outlook given sustained strong consumer demand. The analysts had previously valued the company at 8.4x FY2023 EPS, 1 standard deviation (s.d.) below its long-term historical average.

 

Jarick Seet and Eric Ong of Maybank concur, and say that there is &ldquo more to come&rdquo for Food Empire after its record year, which &ldquo blew past&rdquo theirs and consensus estimates. They expect dividends to &ldquo at least maintain or grow&rdquo as performance continues to improve.

 

&ldquo Food Empire has also been undertaking share-buybacks in the open market and we expect that to continue as management concur that the company is deeply undervalued,&rdquo add the Maybank analysts.

 

They have lifted their FY2023 and FY2024 forecasted patmi by 8.9% and 13.9% respectively, to account for the expected higher revenue growth. Their increased target price of $1.29 from $1.20 previously is based on an 11x FY2023 P/E.

 

&ldquo Food Empire is currently trading at 6.9x core FY2023 P/E, a steep discount versus both its private and listed valuations of global peers. As such, we think that it could be an attractive target for bigger competitors given its strong presence in Russia and Vietnam,&rdquo explain Seet and Ong.

 

Their rerating catalysts include the end of the war in Ukraine, continued strong growth in other markets and revenue diversification away from Russia, an attractive takeover target by bigger F& B players or private equity funds. Meanwhile, downside risks include an escalation of Russia&rsquo s aggression in Ukraine, as higher raw material prices and Ruble depreciation would be negative for Food Empire&rsquo s earnings.