The instant coffee maker's 1HFY2025 headline earnings was a net loss as it booked a one-off US$33 million loss on its redeemable exchange notes. Otherwise, core profit before tax in the same half year to June was above expectations, up 45% y-o-y to US$43 million.
Despite the net loss, Food Empire is paying an interim dividend of 3 cents. The company typically only pays a final dividend.
In conjunction with the higher revenue, Food Empire improved its gross margin to 32.9%, which is above Yeo's expectation as well.
Having turned more positive on the company's prospects, Yeo has raised his FY2026 and FY2027 core earnings by 13% each to take into account higher revenue and better margins.
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According to Yeo, growth in the medium term should be driven by higher production capacity, which will boost sales volume.
Besides Malaysia, Food Empire is in the midst of boosting capacity in Vietnam, India and Kazakhstan between the end of this year and FY2028.
Yeo observes that Food Empire has also re-rated from 10x FY2025 earnings to 17x FY2025 earnings, in line with the broader market since his last update, on optimism over positive fund flows.
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In view of the market rerating and his positive forecast, Yeo derives the new target price of $2.72 after pegging the stock to 18x blended FY2025 and FY2026 earnings, from a lower valuation multiple of 12x FY2025 earnings previously, which is in line with its peers’ rerating.
Yeo warns that downside risks will come from disruptions in operations due to the Russia-Ukraine conflict, and the negative effect of a change in the value of the ruble and other emerging market currencies.
Food Empire shares changed hands at $2.36 as at 10.09 am, down 0.84%.
