Food Empire

Food Empire: ($0.39) Waiting to strike back Global markets are correlating less with the Crimean conflict, as news flow suggests some progress towards stability. With the Russian stock market and ruble rebounding smartly off their lows, Food Empire, which counts on Russia and Ukraine for ~74% of its revenue, may be poised for an earnings rebound and share price recovery. Over the week end, Russian President Vladimir Putin expressed support for Ukraine’s unilateral ceasefire against pro-Russian separatists, even as he ordered large-scale military exercises across central Russia. Investors have started to return to Russian assets, as the threat of a worst-case war scenario has diminished. The Micex index comprising Russia’s 50 largest and most liquid stocks has rebounded 26% to 1,492 from its low in mid-Mar. Similarly, the ruble has risen by ~7% over the same period, recovering nearly half of its losses since the peak of the crisis. In the most recent two quarters, Food Empire’s financials were adversely impacted by the downward revaluation of its outstanding non-USD trade debts, due to its USD reporting currency. If the Russian geopolitical situation improves, the ruble and hryvnia could rebound just as quickly as they came down, which means Food Empire could benefit from the positive FX translation gains in subsequent periods. Operationally, Food Empire continued to perform well in 1Q14, managing to eke out a 2% y/y sales growth in Russia to US$37.1m, and posted a 41% jump in sales in other markets (Europe, Middle East, Vietnam and Malaysia) to US$6.2m. Sales from the Eastern Europe and Central Asia region fell 5% to US$16.8m, nevertheless, sales from Ukraine would have been up 19% in local currency terms, despite the turmoil in the region. Food Empire shares continue to languish near a two-year low, and trade at par to book value. Investors will likely be keeping an eye out for an earnings recovery in the upcoming 2Q14 results (estimated 13 Aug), and return of research coverage, as a potential re-rating catalysts for the stock.