FOOD EMPIRE: Margin boost from change in business model

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Leong Chan Teik

12 June 2013

Tan Wang Cheow, executive chairman of Food Empire. NextInsight file photo.A CHANGE in its business model in Russia helped improve Food Empire's net profit by 11.1% to US$5.6 million in 1Q2013.

Previously, Food Empire would buy ingredients (coffee, sugar and non-diary creamer) for its 3-in-1 coffee brands and sell them to its key distributor in Russia.

In turn, the distributor would engage Food Empire's factory in Russia to package the products, and the distributor would then distribute them all over the country, which is the No.1 market for Food Empire as it accounted for about 62% of sales in 1Q2013.

This arrangement was to minimise Food Empire's inventory risk.

Food Empire recognised revenue when it sold the ingredients to the distributor and again, in the form of fees, when the distributor sold the finished products.

Now, Food Empire has reverted to the conventional business model: buy the ingredients, pack them and sell them directly to distributors in Russia. 

A change to this model -- which has helped lift gross margins 5 percentage points to 51.2% in 1Q2013 -- was highlighted in an article in the current edition of The Edge Singapore, which can be bought at newsstands for S$3.80.

The article written by Gwyneth Yeo also touches on the company's business in Ukraine and the new emerging markets of Myanmar and Africa.

Following the release of the 1Q results in May, an executive director of Food Empire, Tan Guek Ming, bought 180,000 shares at 68 cents apiece from the open market. 

Ms Tan, who is the spouse of the executive chairman, Tan Wang Cheow, now holds 67,547,400 shares, or a 12.68% direct stake in the company.

According to Bloomberg, Food Empire stock (67 cents) trades at 13.3X PE currently, while its peer, Super Group ($4.28), is doing 28.5X PE.

OSK-DMG, the only house covering this stock, has a BUY call with a target price of SGD0.84, pegged to 16x FY13F P/E. 

Food Empire has made its MacCoffee the No.1 selling instant coffee brand in Russia.
Photo: annual report

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