instant coffee

Excerpts from Maybank KE report
Analysts: Jarick Seet & Eric Ong

With the Ukraine war ongoing and no signs of a slowdown, we believe FEH will continue to benefit from strong demand in its core CIS markets, especially in Russia.

In addition, management’s focus on expanding Vietnam has showed positive signs in terms of traction.

As a result, we believe that the upcoming core 2Q23E numbers (due in August) should remain strong and 1H23E should still outperform 1H22E, despite a substantial USD7.3m FX gain in 1H22.

We believe management is exploring other ways to unlock shareholder value and will likely continue its share buy-back programme.
 

Cafe Pho is Food Empire's No.1 selling brand in Vietnam. Photo: Company As of 1Q23, FEH reported strong revenue growth of 24% YoY to USD102.6m and 51% YoY NPAT growth to USD13.8m.

We believe such strong core performance should likely carry into 2Q23E due to strong demand from its core markets.

We also expect Vietnam to grow well due to a refocus of marketing efforts in the region. All in all, we expect 1H23E to remain stronger than 1H22 despite a substantial USD7.3m FX gain in 2Q22.

Management has been doing share buy-backs consistently over the period even at current price levels and renewed its mandate in April 2023.

The last buyback was conducted on 21 Jun 2023 at SGD1.04/share.

Since renewing its mandate, it has purchased about 1.587m shares and we believe this exercise will likely continue as management concurs with our view that the shares are undervalued.

We believe management is also exploring other ways to unlock value for shareholders.

FEH have proven its business model to be resilient and has shown a strong performance despite an ongoing war in its core markets.

We remain confident in management’s execution capability and strong track record. Maintain BUY. 

Full report here

Excerpts from Maybank KE report
Analysts: Jarick Seet & Eric Ong

We expect 3Q23 results (due 9 Nov) to be positive with estimated revenue and PATMI of USD110m and USD11.6m, up 1% and 53% YoY. 

However, the recent depreciation of the Ruble might crimp the results.

We expect demand to remain strong in its core markets (CIS nations and Vietnam) and margins to improve in FY24 as it raised prices by 7-15% during Sept 2023 to counter the Ruble’s depreciation.

Maintain BUY and TP of SGD1.36, based on 11x FY23E P/E. 

Cafe Pho is Food Empire's No.1 selling brand in Vietnam. Photo: CompanyDespite the Russia-Ukraine war, we expect demand in its core markets to remain strong.

Management increased marketing in Vietnam, where we saw encouraging signs of growth when we visited FEH in Aug’23.

Prices have been raised by 7-15% in two tranches, mainly to counter the impact of a weaker Ruble, which has depreciated by 30% since a year ago.

We expect softness in revenue and gross profit in 2H23E as it typically takes about 6 months for price increases to take effect but performance should pick up in 1Q24E.

Management is considering a dual listing in Hong Kong as it would provide access to two equity markets, a more diverse investor and shareholder base, and an additional source of fund raising.

The board also believes dual listing could increase the liquidity of the shares, boost shareholder value and enhance FEH’s corporate profile and visibility in international markets as FEH is seeking inorganic growth opportunities globally.

FEH’s business model has proven to be resilient and we are confident in management’s execution capability as it has a strong track record.

Further share buybacks would support the stock price. Maintain BUY.

Full report here

•  After a 30+% gain over the last 12 months, Food Empire's stock price has been catching a breather of late. What can investors look to for a further re-rating of the stock?   • Well, that's exactly what CGS-CIMB analyst William Tng sought to address. After meeting management, he outlines in a report strategies that Food Empire may take. • There are paths to grow its business organically -- instant coffee production in Kazakhstan and expanded capacity for non-diary creamer production, which is currently playing second fiddle to its core instant coffee business for consumers. • Near-term, if its profits continue to stay strong, and given its net cash of S$120+ million as at end-2023, Food Empire has the ability to return more cash to shareholders via higher regular dividends. Read more below.....

Excerpts from CGS-CIMB report
Analyst: William Tng, CFA

Food Empire Holdings Ltd

We currently value FEH using 11.2x CY25F P/E, 1.0 s.d. above its 5-year mean (2019-23).

In our view, the pathways for FEH to improve its valuation to 14.4x P/E, 2.0 s.d. above its 5-year mean, include:

a) building a new 3-in-1 coffee mix plant in Kazakhstan to further grow its brand strength and presence in the CIS region and Kazakhstan, where the group is seeing strong demand for its products;

b) further grow its food ingredients business (FEH has completed its non-dairy creamer expansion in Malaysia, and we expect volume production to commence by 2Q24F.

Food Empire produces non-diary creamer from its factory in Pasir Gudang, Johor. Photo: Company

In India, FEH’s spray dry and freeze dry coffee plants are at full capacity and FEH expects demand to remain strong.

We think FEH can grow its food ingredients business into a bigger net profit contributor over the next 5 years via expansion with new plants for non-dairy creamer, coffee powder and potato snacks); and

c) explore valuation uplift via dual listing in other exchanges where there is stronger interest in branded food and beverage companies.

Key re-rating catalysts:

a) improving operating margins on stabilising market demand, and

b) maintaining its market share in its key market, Russia.

Key downside risks are:

1) an escalation in the Russia-Ukraine conflict affecting its Russian operations, and

2) depreciation of the Russian ruble against US$, leading to lower revenue in US$ terms. 

Full report here

The share price of Food Empire Holdings has surged 35% year-to-date ahead of, and since, its FY2022 results release (see chart). This may partly be because the company has signalled its positive view on its business through frequent share buybacks, mostly from Aug 2022, reinforced by strong quarterly results since 1Q2022 -- and the CEO's investor briefings. Chart: Yahoo! However, probably because of multiple uncertaintites arising from the Ukraine war since Feb 2022, investors began to embrace the Food Empire story only from 3Q, thanks in part to positive analyst reports and the business resilience demonstrated in Food Empire's 1Q, 2Q and 3Q results. Underpinning the strong business performance were increases in Food Empire's selling prices to counter higher raw material prices or foreign currency devaluation. FY22 profit -- with an implied strong 4Q -- was an all-time high, along with proposed record dividends (4.4 cents/share):  Full-year dividend FY18 FY19 FY20 FY21 FY22 SGD cent 0.68 2.2 2.2 2.2 4.4 *Historically, Food Empire has not paid interim dividends

Here's CEO Sudeep Nair's take, articulated at an investor briefing last week, on the company's underlying strength: 


UOB Kay Hian and Maybank KE have put out reports analysing the FY2022 results, excerpts of which are republished in FOOD EMPIRE: After record profit, dividend, what do UOB KH and Maybank say? 

Food Empire's FY2022 net profit of US$60.1 million included a gain on disposal of Food Empire's 100% interest in an industrial building in MacPherson which housed its Singapore HQ and tenants.

Minus that, the core net profit was US$45.1 million (+134% y-o-y). 

It's worth noting that within the figure is a US$2 million impairment of one of the brands of Food Empire and a US$1 million impairment of an associate company (more on this below).

These are non-cash items and were recognised in 4Q2022, without which profitability would have been even higher.

The big picture is, Food Empire today is much more diversified by geography and it's vertically integrated -- but that wasn't the case 10 years ago.

Its FY2012 annual report showed that its revenue source was relatively concentrated back then: 


In contrast, FY2022 revenue sources were diversified with Southeast Asia and South Asia generating nearly US$133 million revenue: 

Q: What are you going to do with US$125 million cash (on the balance sheet as of end-2022)?

A: We've just announced record dividends to shareholders. We'll do share buybacks, we will need cash for a strong balance sheet to manage all the volatility and never be under pressure from any financial institution.

The group is self financing, it generates a lot of cash flow. Our objective is to reward shareholders over a longer period, diversify, diversify our business and make the company stronger. We want to build new businesses or grow or do something elsewhere. 

Q: Can you clarify the impairment on a brand as well as an associate?

A: It was an impairment on a brand we acquired maybe 15 years back in Russia and Ukraine, so that brand has presence in Ukraine mostly. And it’s sold mostly in the eastern part.For Ukraine, the discount rate used was very high, 40-50%.

The associate is a company in Italy we had invested in. It’s a retail business that was doing quite OK but post COVID they had to close down some outlets.

The Q&A content has been edited for brevity and clarity.
For more on the FY2022 results, see Food Empire's announcement here. 

THE CONTEXT •  Food Empire's business has proven to be resilient through the Covid pandemic and past supply chain disruptions and forex volatility. Some challenges have passed for this producer of 3-in-1 coffeemix but a tough one has reared its head since last year -- rising coffee bean prices. •  In a new report, CGS International recognised the likely impact of high coffee bean prices on the upcoming FY2024 results. (The longer-term impact can be softened as typically when input prices go up, Food Empire raises its product selling prices -- but there is a time lag) .  CGS also expected foreign exchange impact (the Russian ruble has weakened further) and higher marketing expenses in the fast-growing Vietnam market. Executive Chairman Tan Wang Cheow and CEO Sudeep Nair grace the opening of the company's new HQ in Tampines Grande in January 2025. Photo: Company/Facebook • CGS expects Food Empire to report full-year US$46 million net profit (-18% y-o-y) on a net margin of ~10%, which is similar to 1H2024. CGS also expects the company to propose a dividend of at least 5 cents/share in the upcoming FY24 results --  but not a repeat of the 5-cent FY2023 special dividend that was handed out following the sale of Food Empire's industrial building.  • Food Empire recently moved its HQ office to Asia Green in Tampines, and held an opening ceremony last week (picture above). Read below excerpts of  CGS' report.....

Excerpts from CGS International report
Analyst: William Tng, CFA

We roll over our valuation to FY26F, leading to a higher S$1.53 TP, based on an unchanged 11.2x P/E multiple, 1.0 s.d. above its 5-year mean (2019-23).

We reiterate Add due to:
a) its potential to grow its operations in Vietnam into a new major revenue contributor, and

Food Empire's best-selling Cafe Pho is sold largely through mom-and-pop outlets in Vietnam. File photo.b) its potential to grow its food ingredients business.

Key re-rating catalysts:
a) improving operating margins on stabilising market demand,

b) sustained market share in its key market, Russia, and

c) a resolution to the Russia-Ukraine conflict.

Key downside risks:
1) an escalation in the Russia-Ukraine conflict affecting its Russian operations, and

2) depreciation of the Russian ruble against US$, leading to lower revenue in US$ terms.

Full report here