Food Empire – potential bullish chart development amid volume expansion (11 Nov 2019)
This week, Food Empire caught my attention with their potential bullish chart developments amid volume expansion. This may be an opportune time to take a look at Food Empire on the back of its potential bullish chart and strong results released this evening. Do take a look at the basis and more importantly, the risks.
A) Chart looks positive with strengthening indicators and volume
Based on Chart 1 below, Food Empire has been trading in six-month trading range $0.490 – 0.550 and is now on the verge of challenging its key resistance around $0.550 with increasing volume. It closed at $0.540 on 11 Nov 2019. Amid the positively placed DIs, ADX closed at 37.7 on 11 Nov 2019, indicative of a trend. All the exponential moving averages (“EMAs”) are rising with golden cross formations. In addition, indicators such as MACD, OBV and RSI are strengthening. MACD has done a bullish MACD line crossover and centreline crossover. A sustained breach above $0.550 with volume expansion is positive with an eventual technical measured target of around $0.610.
Near term supports: $0.535 / 0.525 / 0.515
Near term resistances: $0.550 / 0.565 / 0.600
Chart 1: On the verge of testing its key resistance $0.550 with rising volume
B) Total potential capital upside of around 37%
Based on RHB report, RHB has a target price of $0.73 as they believe that Food Empire is likely to register strong earnings growth of 22% this year. Coupled with an estimated dividend yield (by RHB) of around 1.6%, this represents a total potential return of around 37%. There is, however, a possibility that RHB may raise the earnings estimates for Food Empire as Food Empire’s 9MFY19 net profit (US$20.8m) already comprises of 94% of RHB’s full year 2019 earnings estimates. Readers can refer to Food Empire’s analyst reports HERE.
C) Results – seem to be improving
Based on Table 1 below, Food Empire’s results have improved significantly. 9MFY19 revenue and net profit rose 0.4% and 37.9% to US$215.3m and US$20.8m respectively, on rationalisation of business and lower FX loss. Balance sheet remains strong with US$44.6m in cash and cash equivalents, compared to US$53.1m of borrowings and debt securities. Based on management’s commentary in their 9MFY19 results, notwithstanding U.S. & China trade tensions, they expect their business to remain resilient and they are on track to implement their multi-year strategy to strengthen the Group by focusing on sustainable growth through organic initiatives and pursuing M&A opportunities.
Table 1: 9MFY19 net profit up 38% y/y
D) Trades at a discount to peers and to itself
Based on Table 2 below, Food Empire trades at FY19F PE of around 9.9x, as compared to its peers of around 20.4x PE. Furthermore, Food Empire trades at 1.1x P/BV which is also at a stark discount to its peers’ average P/BV of 4.1x. In addition, based on Bloomberg, Food Empire trades at 9.7x current PE as compared to its 10-year average PE of 32.7x. Hence it trades at a substantial discount to peers and to itself.
Table 2: Food Empire trades at a substantial discount to its peers
As usual, there are many risks involved, especially in small caps. In my opinion, some obvious risks are difficulties in reading illiquid stock chart accurately, illiquidity and forex risk (not to mention potential business execution risks which apply to all companies).
A) Chart analysis is less accurate for illiquid stock
Chart analysis is more difficult to read for illiquid stocks which can move up or down with little volume. Hence this is a risk which readers need to be aware of.
B) Forex risk
As Russia is Food Empire’s largest market, any sharp depreciation in RUB is likely to have an adverse effect on Food Empire.
C) Limited analyst coverage
Only RHB covers Food Empire with a target price of S$0.730. It is reasonable to say that the investment community is either still unfamiliar with Food Empire or / and not convinced about the company’s growth potential. If Food Empire can continue to deliver on its results and growth strategies, it may be a matter of time before the investment community takes note of this company.
Food Empire is an illiquid stock. Average 30D volume is around 169K shares traded only. Therefore, it may be subject to large price movements should there be sudden buying or selling interest.
Food Empire seems interesting due to its chart development, good set of results, and relatively attractive valuations vis-à-vis its peers. Nevertheless, forex, execution and illiquidity risks are some of the risks which investors need to consider. Readers, as usual, please do your own due diligence and exercise your independent judgement.
P.S: I am vested for trading purposes only.
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