Singaporeans’ passion for food is well-known, and as Warren Buffett once said “never invest in a business you cannot understand”, looking at companies in the food and agricultural industry can be a good choice for retail investors in Singapore.
In this article, we will look at, the latest analysts updates on four stocks in these industries.
1. Old Chang Kee (OCK)
The latest earnings report from OCK revealed that the revenue from the first half of 2018 was within expectations with high performance from retail outlets. However, margins suffered due to rising costs.
Nevertheless, revenue from OCK’s retail outlets increased by 8.7% year-on-year in the first half of 2018 with the opening of new outlets and higher sales growth from existing stores.
As reported previously on Shares Investment, OCK expects to open its first flagship outlet in London, the UK in 2018.
Phillip Securities Research analysts opine that the revenue generated from one store will likely not be significant, but it “serves to uplift OCK’s brand positioning in the global platform”.
Revenue growth is expected to come from product innovations and new stores opening.
While OCK faces higher raw material costs it has invested in a new factory and equipment that leads to higher production capacity and efficiency.
PSR is positive of OCK’s expansion plans and has thus given Old Chang Kee Limited (SGX: 5ML) a Buy call with a discounted-cash-flow-derived target price of $0.98.
2. Neo Group
Neo Group’s results have been hit by losses with its newly acquired subsidiary, U-Market, which manufactures “Joo Chiat Kim Choo rice dumplings, trading and processing of meat products, as well as retail outlets”.
The management team at Neo Group is currently planning to close down unprofitable retail outlets and to consolidate the operations to cut-cost and improve earnings.
In the future, it is likely that U-Market will be able to utilise Neo Group’s distribution network to increase sales and export products, and hence, report better performance.
Better results were reported from other subsidiaries and profitability from its food catering business has also increased due to decreasing expenditure on promotions and advertisements.
However, a major concern with the group’s financial strength lies with its high gearing level, which stands at 213%, coupled with having a net liability position.
Analysts at RHB Research opine that the group “needs more time to raise its profitability to improve its financial position”, and hence has given the stock a “Neutral” call, with a target price of $0.64.
3. Bumitama Agri
The oil palm plantation company maintains its target of achieving 25% growth on its fresh fruit bunches (FFB) year on year for FY17, translating to an output growth of 9.0% quarter-on-quarter.
Coupled with lower unit costs from crude palm oil (due to a lower application of fertiliser), analysts at RHB Research expects a stronger quarter-on-quarter earnings growth in the last quarter.
As management has warned that peak period from the plantations may be slightly delayed, RHB Research has decided to be more conservative in their projections.
Analysts reduced forecasted growth for 2017 to 23% year-on-year, but increased their assumptions for the next two years to 16-18% respectively, up from 15 to 17% previously.
Overall, though output forecast on FFB was reduced by 7.0% for this year, estimates for the FY18-19 was raised by 3.0-5.0% respectively, and target price-to-earnings ratio increased to 12 times from 11 times.
RHB Research gave Bumitama Agri Limited (SGX: P8Z) a Buy call with a target price of $0.95.
4. Wilmar International
With great performance coming from oilseeds and grains in both sales volume and profit margins, Wilmar’s results for the third quarter was within expectations.
The 9M17 revenue of Wilmar increased by 9.7% year-on-year due to higher sales volume across all divisions.
However, core earnings were dragged down by lower contributions from the tropical oils divisions due to lower profit margins, and lower sales volume coming from the sugar division.
According to UOB Kay Hian Research’s (UOBKH) report, the high margins from oilseeds is expected to “remain positive for the rest of the year”, and the “potential cap in soybean imports from China could lead to better crushing margins”.
Overall, analysts at UOBKH saw no changes to their earnings forecasts and maintain their Buy position on Wilmar International Limited (SGX: F34) with a target price of $4.10 for the stock.