vietnam

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 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.

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 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

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. 

InnoTek Limited ($0.475)

Innotek recorded improved performance in the Group’s Automotive and Office Automation (“OA”) business segments, boosting the top line for the six months ended 31 December 2022 (2H’22) to S$102.3 million, 14.6% higher than S$89.3 million in 2H’21.

The OA segment recovered strongly as supply chain disruptions eased, resulting in higher sales from key customers in China and Thailand. Revenue for the segment’s parts assembly business also increased, reflecting the success of the Group’s efforts to move up the value chain.

Meanwhile, the Auto business benefited from stimulus policies implemented in China and higher orders from customers making up for lost production time during COVID-related lockdowns.

Growth was partially mitigated by weaker demand overseas as well as in the Chinese commercial vehicle market.

The top line improvement for 2H’22 and FY’22 was partially offset by lower turnover in the TV and Display segment, mainly due to dampened consumer sentiment amid the Russia-Ukraine conflict, high inflation in Europe and USA, as well as an oversupply in the European TV industry.

The Group also recorded improved performance in the gaming machine and medical device businesses, partially offset by slower-than-expected progress in other businesses such as 5G servers.

Looking ahead, business momentum is largely expected to improve, as the country lifted its “Dynamic Zero” COVID policy in January 2023.

However, the Group is closely monitoring several headwinds such as fluctuating export demand, soft domestic demand, further disruptions to the global supply chain due to the prolonged Russia-Ukraine war, and elevated levels of inflation.

7th consecutive quarter of profit

“InnoTek has closed its seventh consecutive year of profitability, underscoring our resilience in the face of numerous challenges.” -- Lou Yiliang, CEO,  InnoTek

Pent-up demand in China is expected to boost recovery in the Group’s Auto segment; meanwhile, the Group intends to ride the growing adoption of Electric Vehicles (“EVs”) to offer its precision stamping expertise and become a strategic partner for key EV customers.

For the OA segment, the Group expects a near- to medium-term slowdown, amid waning recovery and a shift in market demand from China into Southeast Asia.

In response, the Group is expanding into parts assembly, compared to single-piece manufacturing. For the TV and Display segment, short-term demand is expected to be impacted by softer Europe and American markets.

The Group remains confident its key customers will maintain market share in the high-end TV market and is focusing on improving technical capability, upgrading the Group’s products and implementing cost-control measures to meet long-term demand.

The Group continues using its internal resources to strengthen production capabilities in its manufacturing facilities in Rayong, Thailand, which has steadily increased production of OA and Auto products, as well as Bac Ninh, Vietnam, which has commenced the production of bespoke-design heatsinks for a TV customer and will start the production of TV bezels in the first quarter of 2023.

Meanwhile, the Group will continue its plan to diversify into emerging industries and establish partnerships in the medical devices, 5G servers, and gaming machine sectors.

These partnerships are expected to bear fruit in the coming months and will contribute to financial performance from FY’23.