First-ever loss. Food Empire Holdings Ltd (FEH) missed our estimates as it slipped into a US$2.2m loss in 1Q09 - the group's first-ever loss in its history. This was against a US$6.8m profit in a year ago and a US$3.2m profit in 4Q08. Revenue contracted sharply by 44.8% YoY to US$28.8m as all its key markets registered lower sales. Russia, its key revenue contributor reported a 55.2% dip in sales, while Eastern Europe and Central Asia turned in a 30.2% decrease in revenue. The weak sales were due to inventory de-stocking by distributors following a build up of stocks in 4Q08, which had turned out to be softer than originally anticipated.

The worst could be over. Other factors that led to the group's poor 1Q09 performance were: (i) the credit crunch which tightened purchasing power of distributors; (ii) depreciation of FEH's key markets' currencies against the USD, which had the effect of raising FEH's prices in local terms; and (iii) deteriorating consumer demand in light of the economic recession. While these lingering concerns will continue to create an overhang on the group's sales, management remains optimistic that the worst could be over. We expect demand to return in 2H09 after inventories have been depleted.

Healthier balance sheet. Poor sales aside, FEH reported a remarkable improvement in balance sheet health. The group emerged to a net cash position of US$18.1m from a net debt position of US$1.1m a year ago, while operating cash inflow tripled to US$19.6m from US$6.7m a year ago, thanks mainly to lower receivables. Management has been focussed on strengthening its balance sheet health, and this should help the group to tide through tight credit markets.

Maintain HOLD with a lower fair value estimate. We have lowered our revenue and earnings estimates to account for FEH's weak 1Q09 performance. In light of the group's cash conservation priorities, we have also lowered our dividend assumptions to 0.18 S cents per share (previously 0.35 S cents), bringing the yield to 0.6% (from 1.2%). As a result of our revised assumptions, our fair value estimate, which is pegged to 1x FY09F NTA, drops to S$0.305 (from S$0.33). We maintain our HOLD rating on the stock.