UOB Kay Hian is keeping its “hold” recommendation on Food Empire Holdings but with a higher target price of $1.10 from $1.00 previously.
In its Jan 20 report, analysts John Cheong and Heidi Mo are upbeat on the group’s upcoming 2HFY2024 ended December 2024 earnings release on Feb 26 after trading hours. “We are expecting 2HFY2024 net profit at US$22 million – US$23 million (vs 1HFY2024: US$24 million, 2HFY2023: US$30 million). This will bring full-year net profit to US$46 million – US$47 million.”
While revenue is expected to see growth on strong demand and increased marketing efforts, particularly from the Southeast Asia segment, the analysts believe that margins are likely to take a hit from currency devaluation and rising coffee prices.
Meanwhile, Food Empire has invested US$80 million into a new freeze-dried coffee manufacturing facility in Binh Dinh, Vietnam, located near coffee-growing regions and funded by both borrowings and internal resources.
This strategically positions the company to leverage low production costs, access quality coffee beans and tap into the growing Southeast Asian coffee market. The group’s second coffee facility will commence construction in 1Q2025, and is expected to be completed by early-2028.
“We think that this vertical expansion will grow its ingredients business and strengthen the company’s presence in the rapidly growing Southeast Asian market, while effectively diversifying away from Russia,” say the analysts.
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In May 2024, the group had also revealed plans to establish its first coffee-mix production facility in Kazakhstan, with an expected completion by end-2025. Once operational, the facility will produce coffee-mix sachets under the group’s various brands, including the flagship MacCoffee brand, which is sold in over 60 countries.
In Aug 2024, it also formed a strategic partnership with Ikhlas Capital to support the growth of its business segments in Southeast Asia and South Asia. Both the Southeast Asia and Ukraine, Kazakhstan and CIS segments marked strong double-digit y-o-y revenue growth, and the analysts think that Food Empire is effectively focusing on these markets to expand further.
While things look rosy on the growth front, near-term gross margins are expected to remain subdued.
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Coffee prices have rallied to record highs, underpinned by reduced output due to poor weather in Brazil and Vietnam. Supply chain disruptions like the Red Sea crisis and the EU Deforestation Regulation (EUDR) have also led to price increases in 2024. Moving into 2025, as the EUDR has been postponed, demand is expected to subside while supply may improve on higher rainfall.
The analysts also see potential downside to currency translation amid exchange rate volatility, especially from Russia, Ukraine and Vietnam, as the currencies depreciate against the USD.
As at 4.10pm, shares in Food Empire are trading at $1.00.
