FREE Stock in Focus: Emperador Inc. (EMI) – 25 Jan 2024 by AP Securities

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Summary of Broker’s Recommendation

We recommend investors to reduce their positions in EMI as we feel that the combination of its expensive valuations and the current Red Sea crisis present headwinds against the stock’s price potential. We have a Sell recommendation on EMI with a Target Price of P20.52 per share.

At its current forward Price-Earning (P/E) ratio of 29.1x, EMI is trading at a whopping 160.6% premium to the index which we feel is greatly unwarranted given the likely cost challenges that the company is likely to be facing this year. Upon factoring in their respective EPS growth, EMI’s Price-to-Earnings Growth (PEG) ratio stands at a steep 2.47x vis-a-vis the index’s level of only 1.43x, further highlighting EMI’s expensive price tag.

Analysis and Opinion

Rerouting of shipping to cause headaches

For at least the first half of the year, we feel that the recent rerouting of shipping companies away from the Suez Canal and towards the longer round-about in the Cape of Good Hope could significantly impact both EMI’s logistical costs and raw
material expenditures. The Suez Canal serves as the only direct route for trade between Europe and Asia, and its removal from the equation has therefore led to a surge in shipping and container costs. World prices for 40ft containers are already
reflecting this as they are already up by a whopping 81.7% YoY.

Negative impact on COGS

Given EMI’s heavy exposure to suppliers in the European geographical area, it is highly likely that the rerouting of ships will be also be impacting the availability of the company’s raw materials, thereby forcing it to order more inventory in order to offset the 2-week increase in the journeys of cargoes. This would however have the negative effect of inflating the company’s cost of goods sold (COGS) and pressuring its margins downward.

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