3Q23: Results Beat Expectations As Demand Still Reigns In Core Markets; Raise Target Price By 20%
FEH’s 3Q23 net profit of US$15.7m (+106.6% yoy, +22.7% qoq) was above expectations, with 9M23 making up 84.6% of our full-year forecast. Despite currency fluctuations, FEH reported record-high 9M23 revenue. Margins also improved with an optimised product mix, higher volumes and higher ASPs. We believe earnings growth will continue as demand across its core markets remains robust, and raise 2023/24/25 earnings by 8%/9%/6%. Maintain BUY with a 20%-higher target price of S$1.63 (S$1.36 previously).
• Results above expectations. Food Empire Holdings’ (FEH) 3Q23 core earnings of US$15.7m (+107% yoy) exceeded our expectations, with 9M23 forming 84.6% of our full-year estimate. Excluding a one-off gain of US$15m on the disposal of a non-core asset in 3Q22, 3Q23 earnings recorded a substantial 106.6% yoy and 22.7% qoq growth. The record-high 9M23 revenue of US$305.1m (+6.7% yoy) was mainly driven by higher volumes and/or higher ASPs across FEH’s core business segments. Gross margin also improved 5.3ppt yoy to 34.3% as a result of a favourable sales mix of products with higher margins.
• Revenue growth in spite of currency depreciation. Revenue for 9M23 grew 6.7% yoy despite the depreciation of the Russian ruble and Ukrainian hryvnia against the US dollar. This was mainly due to the double-digit growth in the Ukraine, Kazakhstan and CIS and South Asia segments, as higher contributions were made by the Kazakhstan market and India’s freeze-dry coffee manufacturing plants. FEH’s other core markets, Russia and Southeast Asia, also achieved revenue growth of 4.9% in 9M23. However, 3Q23 revenue fell 1.6% yoy to US$106.8m as a result of the Russian ruble depreciating against the US dollar, where Russia’s 3Q23 revenue fell to US$33.8m (-20.3% yoy). We note that in local currency terms, all core markets achieved higher revenue during the quarter, pointing to robust demand across the markets.
• Resilient consumer demand and strong brand equity. Despite implementing pricing adjustments across most of its operating markets during the year, FEH’s sales volumes continued to rise, demonstrating the price inelasticity of its products. Additionally, FEH’s overall performance has surpassed our expectations in the face of currency devaluations in 9M23. We believe that this is testament to its strong brand equity and experience in navigating currency fluctuations effectively.
• Potentially higher dividend with strong cash flows. Amid inflationary pressures and currency volatility from geopolitical uncertainties, FEH has shown a strong performance in 9M23. Volume growth and its price adjustments (averaging 8%) in Sep 23 have translated to improved margins, while its cash position is relatively stable at US$115.6m (2022: US$125.6m). Given its performance thus far, we opine that FEH may propose a higher dividend for 2023. To recap, in 2022, FEH reported record-high core earnings of US$45m, and proposed a record first and final dividend of 4.4 S cents per share (2021: 2.2 S cents per share).
• Frequent share buybacks to date reflect confidence. Since Jul 23, FEH has bought back 2.9m shares at up to S$1.11. This is close to the 52-week high share price of S$1.18, showing management’s confidence in the future growth outlook.
• We raised our 2023/24/25 core earnings estimates by 8%/9%/6% to S$54m/S$58m/S$61m, up from S$50m/S$54m/S$57m, to reflect the better-than-expected earnings for 9M23 and
improving net margins from the successful increase of product ASPs.
• Maintain BUY with a 20%-higher PE-based target price of S$1.63 (S$1.36 previously), pegged to 11x 2024F EPS, or its long-term historical mean. With 9M23 revenue reaching a record high despite currency headwinds, we are of the view that FEH has demonstrated its ability to deliver strong results and will continue to perform moving forward.
SHARE PRICE CATALYST
• Dividend surprise from robust financials.
• Better-than-expected sales volumes across all business segments.
• Improving net margin from higher ASPs and effective cost management.