•  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 ..... 

profit 10yrs


Excerpts from CGS-CIMB report

Analyst: William Tng, CFA

Food Empire Holdings Ltd

Working towards a re-rating

■ We visited Food Empire Holdings Ltd (FEH) for an update on 26 Mar 2024. 

Food Empire

Share price: 
$1.35

Target: 
$1.84

■ In our view, YTD operations have been business as usual, and we expect FEH to provide a 1Q24F business update in May 2024F.

■ We reiterate our Add call on FEH. In this note, we assume FEH will pay out 45% of net profit as dividends. Special dividends remain possible, in our view.

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.
 

 

What will it take for FEH’s valuation to re-rate further?

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.

NDC factoryFood 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.

Reiterate Add; reflecting a more realistic dividend expectation

CafePho423Cafe Pho is Food Empire's No.1 selling brand of instant coffee in Vietnam. Photo: CompanyIn FY23, FEH declared a final DPS and special DPS of 5.0 Scts each.

In terms of dividend scenarios, we think:

a) FEH can consider declaring interim dividends so that shareholders can enjoy a share of the company’s excess cash twice instead of having to wait till the full-year results (FEH currently only declares full-year dividends), and

b) FEH can continue to remain attractive as a divided-yield stock.

We raise our FY24-26F DPS forecasts by 53.2- 74.8%, leading to more attractive FY24-26F dividend yields of 5.04-5.75%.

Our TP is maintained at S$1.84 (11.2x CY25F P/E), 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,

b) its potential to grow its food ingredients business, and

c) the end of its current major capex cycle in FY23, allowing FEH to improve its dividends.

 

CASH RICH

JarickSeet3.18“As the company is in a net cash position of US$94.9m as at end-Dec 2023, future capacity expansion can be funded via a debt-equity mix, allowing FEH to pay a DPS that is higher than 5.0 Scts.”

-- Analyst William Tng

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

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