Returned to profitability in 2Q09. Food Empire Holdings Ltd's (FEH) 2Q09 results came in below expectations. Revenue fell 56.3% YoY to US$26.9m while net profit plunged 99.1% to US$41k. Sequentially, revenue slipped by 6.3%, but bottom line improved from a US$2.2m loss in 1Q09, reaffirming our view that the worst is over. Nevertheless, its 2Q09 earnings were insufficient to offset 1Q09 losses, leaving the group with 1H09 net losses of US$2.2m. No dividends were declared.

Poorer sales across all markets. Weaker sales were recorded across all its key segments in 2Q09. Russia reported a 64.1% YoY slide in revenue to US$12.5m, while Eastern Europe & Central Asia turned in a 55.2% contraction in sales to US$10.0m. FEH blamed its poor showing on the challenging business environment as well as the depreciation of local currencies in the group's key markets against the USD. On a brighter note, the operating environment showed signs of stabilisation in 2Q09. Going forward, a revival of consumer demand, inventory restocking among its distributors, as well as forex stabilisation could bolster the group's performance.

Financial prudence pays off. FEH's efforts to reduce inventories and receivables led to an improvement in operating cash inflow to US$31.9m from US$4.8m a year ago, with the group remaining in a net cash position. The group disclosed that it is in technical breach of certain financial covenants in relation to its US$14.0m borrowings owing to poor profitability. It is in the midst of negotiating for waivers. Nevertheless, given its strong US$42.8m cash position, it will have no problems repaying the loan even in the worst case scenario that immediate repayments are required. The group's strong financial position also equips it with the financial muscle for acquisitions of distressed assets should opportunities arise.

The worst is over. Maintain HOLD. We have lowered our FY09 and FY10 earnings estimates by 43% and 39% respectively following FEH's poor 1H09 performance. We expect the group to remain profitable for the full year as the worst appears to be over and global economies are showing signs of recovery. While we forecast a 10% dividend payout ratio, any payouts remain uncertain given management's cash conservation priorities. We roll over our valuations to blended FY09/10 NTA, deriving an unchanged fair value estimate of S$0.305. Given that FEH trades close to its NTA and is expected to benefit from an improving outlook, we maintain our HOLD rating on the stock.