Russia

Company Profile
 Food Empire (FEH) is a global F&B company that manufactures and markets instant beverages, frozen convenience food, confectionery and snack food. The company’s products can be found in over 50 countries across Asia, Africa, Middle East, North America and Europe.

Cafe Pho is Food Empire's best-selling instant coffee in Vietnam.

Excerpts from RHB report (TOP SINGAPORE SMALL CAP COMPANIES -- 20 JEWELS 2023 EDITION)
Analyst: Alfie Yeo

Investment Merits Report dated 16 May 2023  Growth continues to be driven by the core Russia, Ukraine, Kazakhstan and Commonwealth of Independent States (CIS) markets, and supplemented by the South-East Asia segment  Operations in Russia and Ukraine continue to be stable as heavy fighting is in the east of Ukraine – away from its factory, which is in the central region.  Valued at 7x FY23F P/E, ie below the historical mean, or 6x P/E on an ex-cash basis. Offers c.5% dividend yield

Highlights

Russia, Ukraine, Kazakhstan and CIS markets continue to drive growth, supported by South-East Asia. Meanwhile, its sales in Ukraine remain stable despite the Russia-Ukraine conflict, as FEH is in the business of supplying essential items, ie food and drinks.

Its market share has been growing, especially in Russia, and we expect sales growth to continue beyond FY23, as it leverages on the popularity and higher demand for its products there.

Elsewhere, FEH has been building its non-dairy creamer production facility in Malaysia, and we expect this to support overall growth.

 
FEH, a producer of essential food items, has not seen any major sales disruptions in Russia and Ukraine. Retail channels and supply chains continue to run.

Due to its marketing efforts, its sales in Russia and Ukraine surged by close to 30% YoY each in FY22.

Also, its sales volumes remain stable in Russia and Ukraine, even though selling prices have increased.

FEH’s factory in Ukraine is located in the central region – away from the heavy fighting that is concentrated in the east of the country.

Barring battle lines progressing into the central Ukraine, which is a key risk to our earnings forecast, we see a stable outlook for earnings in these key markets.

As a brand owner, FEH was able to sustain its profitability better than distributors and retailers, especially in Russia and Ukraine.

 
FEH’s share buyback activity has accelerated in the past two years.

The number of treasury shares increased from 1m shares in 2018 to 8.6m in FY21 and 14.3m in FY22.

The strong cash flow generated from operations has provided it with ample cash resources to conduct such share buyback activities, which improves EPS and boosts shareholder value.

Company Report Card

Revenue and core earnings grew 25% YoY and 143% YoY to USD415m and USD52m.

Revenue growth was largely driven by Russia (+29% YoY, USD148m) and Ukraine, as well as Kazakhstan and the CIS countries (+29% YoY, USD92m).

This was offset by the slight post-COVID-19 normalisation in the South-East Asia segment (-4.2% YoY, USD93m).

Gross margin expanded 0.5ppt to 29.8% on some price adjustments, while EBIT margin reached 14.3% (+5.7ppts) on better leverage and economies of scale in Russia after reaching its highest market share in FY21.

A first and final DPS of 4.4 SG cents was declared, with a dividend payout ratio amounting to c.35% of core earnings.

FEH is a brand owner and manufacturer of branded F&B products and, as such, its business is cash flow generative.

In FY22, FEH generated operating cash flow of USD71m, equivalent to c.SGD0.18 per share. It has net cash of USD87m, or c.SGD0.22 per share.

The company’s cash balance has increased steadily from USD28m in 2015 to USD126m currently.

Uses of cash include share buybacks, building up manufacturing capabilities and paying out dividends to shareholders

FEH tends to pay around 30% of earnings as dividends. While it does not practice paying interim dividends, there are special dividends given from time to time.

In 2019 and 2021, shareholders were rewarded in special dividends for its strong earnings, and for their standing by the company through a difficult COVID-19 period.

Our DPS assumption, going forward, is tied to 38% payout ratio, as we believe FEH is capable of paying out more – since we expect its cash balance on its balance sheet to swell.

FEH was founded by Tan Wang Cheow, who is its Executive Chairman.

He is supported by CEO and Executive Director Sundeep Nair, who has built and managed the group’s business since 1993.

Sundeep was responsible for the launch and establishment of the group’s brands and businesses in Eastern Europe and CIS countries from 1994 to 2005, prior to his appointment as CEO in 2012.

As of FY22, both Tan’s and Sundeep’s interests are aligned with shareholders, as they are hold substantial stakes of 22.5% and 11.2%.

Excerpts from RHB report

Analyst: Juliana Cai

• 3Q19 revenue grew 5% YoY to USD76.8m. Revenue growth in the quarter was largely driven by higher sales volumes in the Ukraine and Indochina markets.
Food Empire's No.1 product in Russia.Both markets saw double-digit sales growth during the quarter while the group’s largest market, Russia, saw revenue grew at a mature rate of 2% YoY.

However, this was partially negated by a 7% decline in its other markets’ sales due to the rationalisation of businesses in underperforming markets.

• Excluding FX, 3Q19 core PATMI grew 28% YoY to USD8.8m on higher sales and margins. The group achieved a higher gross margin of 39.8% in 3Q19 (3Q18: 38.7%, 2Q19: 37.8%).

The rationalisation of underperforming markets further raised its EBIT margin to 11.9% in 3Q19, marking a 3ppt YoY increase. The improvement came from a 7% decline in general and administrative expenses on top of the higher gross margin.

• We expect 4Q19 earnings to be flattish. The group’s second instant coffee plant in India is expected to be completed this year, and commercial operations are scheduled to kick off in FY20.

While we expect to see continued savings from the streamlining of businesses in 4Q19, this would be partially offset by pre-commissioning costs and depreciation expenses as the new instant coffee plant comes on stream.

• BUY, with an unchanged TP for now. Barring any major depreciation of the RUB, we expect FY20F earnings to remain resilient, as management focuses on key markets and rationalises weaker businesses. Juliana Cai, analyst, RHBThe cost savings should help to offset additional costs from the commencement of its new coffee plant. We will review our earnings and forecasts pending Food Empire’s analyst briefing on Wednesday.

Full report here.

Excerpts from Maybank KE report
Analyst: Jarick Seet

 
Food Empire's best-selling MacCoffee in markets such as Russia. NextInsight file photoAs of 9M22, revenue grew 27% YoY to USD286m driven by growth across all geographical segments, including Russia and Ukraine.

Net margins have also improved significantly from 6.4% in 9M21 to 17.4% in 9M22, aided by higher ASPs. This demonstrates that the Russia-Ukraine war is not hurting operations in FEH’s largest market.

A ceasefire or the end of the conflict could result in a major stock re-rating, in our view.

While FEH is not subject to sanctions, its valuation took a huge hit when war broke out and could recover sharply on a truce, we believe.
 

 
With record profits expected this year followed by the sale of its industrial building, we expect management to reward its shareholders handsomely with a special dividend.

We are forecasting FY22E DPS to total SGD0.04, which implies a decent yield of over 5%.

In addition, FEH has been and is still undertaking significant share-buybacks in the open market. Since Aug 2022, it bought back 5.95m shares and as high as SGD0.82/share in 2021.

"We are forecasting FY22E dividend per share to total SGD0.04, which implies a decent yield of over 5%." -- Jarick Seet, analyst

FEH is currently trading at 7.4x core FY22E P/E, a steep discount versus both its private and listed valuations of global peers.

As such, we think that it could be an attractive target for bigger competitors given its strong presence in Russia and Vietnam.

Note that Super Coffee (not listed) was previously taken over by Jacobs Douwe Egberts (not listed) for SGD1.35b, 30x FY16 P/E in 2017.

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. 

Excerpts from UOB KH report
Analysts: John Cheong & Heidi Mo

MacCoffee is the key brand of instant coffee for Food Empire in its No.1 market, Russia.

• Frequent share buybacks in 1Q23 at near 52-week high. Food Empire Holdings (FEH) has continued to buy back its shares in 1Q23 after releasing a strong set of results in Feb 23. In 1Q23, FEH has bought back close to 2m shares at S$0.65-0.90. This is close to the 52-week high share price of S$0.96.

• Strong core earnings growth in the last four consecutive quarters and doubling of dividend for 2022. FEH has reported strong core earnings growth momentum in the last four quarters, with more than 30% yoy growth (1Q22: +34% to US$9.2m, 2Q22: +280% to US$17.9m, 3Q22: +145% to US$7.5m, 4Q22: +119% to US$10.4m).

The growth was mainly driven by an increase in consumer demand for FEH’s products given their affordable price points, improving net margin from easing of supply chain issues and improvement in product mix.

In addition, FEH has declared a dividend of 4.4 S cents per share for 2022, double 2021’s dividend of 2.2 S cents per share.

• Positive development in the Russia-Ukraine conflict could lead to narrowing of valuation discount vs peers, which is at 40-50% currently. China’s president Xi Jinping recently visited Russia in Mar 23 for a three-day state visit.

Although there was no substantial resolution to the Russia-Ukraine conflict, China has continued to position itself as a peace broker by recommending solutions to the conflict as well as calling for a ceasefire and peace talks.

Russia’s leader has also been open to the ideas, highlighting that “many of the provisions” could be “taken as the basis” for a peaceful settlement in Ukraine, “when the West and Kyiv are ready for it”.

We believe positive developments in the conflict could lead to valuation re-rating for FEH as the valuation discount for FEH’s Russia business could narrow.

Currently, FEH’s 2023F PE of 8.3x is at around a 40% discount vs its local peers and at around a 50% discount vs its regional peers.

• Strong consumer demand across segments. Despite rising inflationary pressures and ASPs, FEH does not see major changes in consumption patterns.

Given the consumer staple nature of FEH’s products, demand is relatively price inelastic. For instance, the group’s products in the coffee segment continue to be affordable enough for mass appeal, leading to sustainable or even stronger demand in 2022.

Hence, we see that sales volumes are more sheltered from market volatilities. With supply chain disruptions easing in some markets, we forecast higher earnings and improved margins moving forward.

• Positive brand equity built. Despite challenges in 2022, including geopolitical tensions in its core markets and rising inflation, the group has managed to generate record-level profits.

Additionally, the group was once again recognised as the Top 100 “Most Valuable Singaporean Brands” by Brand Finance for the twelfth consecutive year, with its estimated brand value increasing 17% yoy to US$101m. We believe this is a testament to its strong brand equity.

• Growth in top-line and improved margins lift earnings. With the strong levels of demand sustained amid inflationary pressures and currency volatility due to geopolitical uncertainties, our forecast incorporates a 7%/7% increase in 2023/24 core earnings.

EARNINGS REVISION/RISK
• We maintain our earnings estimates.

Full report here.