Simons Trading Research

Author: simonsg   |   Latest post: Fri, 3 Apr 2020, 3:08 PM


Food Empire - 2019 Record-High Earnings; 194% Higher Dividend Signals Strong Confidence

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  • Food Empire’s core earnings of S$15.5m was in line with our expectations. Earnings growth was boosted by higher core net profit margin expansion of 1.2ppt in 2019 and stable revenue growth.
  • Further, the group has proposed total dividend of 2.0 S cents per share, higher compared with 0.68 S cents per share in 2018, reflecting stronger confidence in 2020 outlook.
  • Maintain BUY. At current Food Empire share price, the stock trades at an attractive valuation of 10x 2020F PE.

Food Empire - 2019 Results

Results in line with expectations.

  • Food Empire (SGX:F03)’s record level core net profit in 2019 (ex forex) of S$15.5m (+17.9% y-o-y) came in within expectations. Full-year revenue grew 1.5% y-o-y due to stronger revenue from Ukraine, Kazakhstan and CIS markets (+10.5% y-o-y) on the back of higher sales volume and appreciation of the Hryvnia against the US dollar.
  • The strong growth in these markets managed to offset the softer revenue from Russia (-0.6% y-o-y) primarily due to the depreciation of the Russian ruble and lower revenue from Southeast Asia (-1.8% y-o-y) and other markets (-3.5% y-o-y) from rationalisation of underperforming markets.

Margins on the rise.

  • Earnings growth in 2019 was mainly driven by core net profit margin expansion of 1.2pt, led by lower selling and distribution expense (-13.3% y-o-y) and general and admin cost (-6.5% y-o-y). This is largely attributed to the group’s successful efforts in rationalisating underperforming markets which has helped improved earnings quality and lifted margins.
  • Although revenue from its Southeast Asia business slipped, we understand its Vietnam business continues to grow strongly, registering double-digit revenue growth.

Higher dividend shows Food Empire’s confidence.

  • Food Empire has proposed a final and special dividend of 1.0 S cents/share each, translating to a payout ratio of approximately 30%, This is a significant bump up from 0.68 S cents/share in 2018 and is the historical highest level.
  • We think this signals management’s optimism on the outlook for the group and should be sustainable given its strong operating cash flow.

Stock Impact

Margin expansion and steady revenue growth to drive bottom-line.

  • We think that there is room for improvement in margin, especially in its emerging markets such as Vietnam that is still operating at lower margins compared to its core markets and should benefit from better scale as the group grows its operations in the country.
  • Furthermore, management stated that it will continue to restructure business operations and streamline the organisation into a more cost efficient and sustainable global business.

Limited impact from COVID-19.

  • The group shared that the COVID-19 outbreak is unlikely to have any direct or significant impact on its plans for the year. We note that amongst Food Empire’s core markets, Vietnam has the highest number cases at 16 as of 24 Feb 20 (source: WHO). However, based on media reports, it appears that most cases are from rural areas and the areas are being sealed to contain the outbreak.

Construction of a second non-dairy creamer (NDC) plant.

  • The group also announced that it would commence the construction of a second NDC project on its existing plot of land located in Iskandar, Johor, Malaysia which will offer a wider range of NDC products once completed. The project will take place over the next 24 months and we reckon a more meaningful contribution will kick in from 2022-23 onwards.

Earnings Revision

  • We introduce our 2022 net profit forecast of S$32m. We make no changes to our 2020 and 2021 earnings forecasts.
  • Maintain BUY with a higher PE-based target price based on 12.6x 2020F PE, in line with its long-term historical average (excluding outliers).
  • We revise upwards slightly our SGD to USD exchange rate used to compute our target price from 1.36 to 1.38 given the stronger SGD/USD movements. At current Food Empire Share Price, the stock trades at an attractive valuation at 10x 2020F PE, significantly lower compared with peers’ average of 21x.

Share Price Catalyst

  • Higher-than-expected volume growth.
  • Earnings-accretive M&A opportunities.
  • Better-than-expected performance of currencies in key markets.

Source: UOB Kay Hian Research - 26 Feb 2020

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