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CGSI resumes coverage of Food Empire with lower TP of $1.43
Felicia TanFri, Jan 10, 2025 &bull 12:16 PM GMT+08 &bull &bull 2 min read
Despite his &ldquo add&rdquo call, Tng has lowered his target price to $1.43 from $1.73 previously. Photo: Albert Chua/ The Edge Singapore
CGS International analyst William Tng has resumed his coverage of Food Empire Holdings with an &ldquo add&rdquo call. Tng&rsquo s last report on the counter was in May 2024.
In May 2024, Food Empire announced its plans to invest US$30 million ($41.1 million) to build a new coffee-mix production facility in Kazakhstan. The plant will occupy half of a 10-hectare plot, leaving room for future expansion. The plant is targeted to be ready for production by the end of 2025, Tng notes.
Food Empire also announced, in September 2024, that it will invest US$80 million in Vietnam&rsquo s Binh Dinh province, to construct its second freeze-dried soluble coffee manufacturing facilit
On Nov 1, 2024, the company completed its strategic partnership with private equity fund manager Ikhlas Capital to expand its businesses in Southeast Asia and South Asia. Food Empire Holdings issued US$40 million worth of five-year redeemable exchangeable notes (REN) at 5.5% annual interest. The REN can be converted into FEH shares at $1.09 apiece after Nov 1, 2026.
In his Jan 6 report, the analyst says he continues to like the counter for its potential to grow its operations in Vietnam into a new major contributor to its revenue. He also likes the company for its potential to grow its food ingredients business.
Referring to Food Empire&rsquo s results for the 9MFY2024 ended Sept 30, 2024, Tng notes that Southeast Asia and South Asia were the company&rsquo s fastest growing segments at 30.6% y-o-y and 28.3% y-o-y respectively.
He adds that Southeast Asia&rsquo s revenue, which reached US$94.8 million in 9MFY2024, is likely to exceed Russia&rsquo s contribution to the company&rsquo s total revenue over FY2025 to FY2026.
Despite his &ldquo add&rdquo call, Tng has lowered his target price to $1.43 from $1.73 previously. The analyst has lowered his earnings per share (EPS) forecasts by 4.67%, 17.24% and 16.90% for FY2024, FY2025 and FY2026 as he raises his operating expense assumptions with Food Empire increasing its marketing spend in its growing Vietnam market.
The lowered EPS forecasts also factors in US$2.2 million in additional interest expenses from the REN, says Tng.
His valuation basis remains unchanged at 11.2 times FY2025 P/E or 1 standard deviation (s.d.) above its five-year mean from FY2019 to FY2023.
Food Empire reports 11.4% y-o-y growth in 3QFY2024 group revenue at US$118.9 mil
Food Empire has reported a revenue of US$118.9 million for the 3QFY2024 ended September, up 11.4% y-o-y from the same period last year.
For the 9MFY2024, the group&rsquo s revenue saw a 12.8% y-o-y increase to US$344.3 million ($158.2 million).
The top line growth was mainly driven by revenue growth in its South-East Asia, South Asia and Ukraine, Kazakhstan and CIS segments, which saw a y-o-y increase of 23.2%, 16.3% and 10.3%, respectively.
According to the group, the revenue increase from Food Empire&rsquo s South-East Asia segment was mainly due to Vietnam, which emerged as the group&rsquo s fastest growing market. The performance in Vietnam came on the back of the group&rsquo s marketing efforts across all channels including more brand-sponsored giveaways-with-purchase, which led to robust sales and increased brand awareness, adds Food Empire.
Meanwhile, revenue growth in the group&rsquo s South Asia segment was driven by increased sales volumes and higher pricing, which was in line with higher coffee prices.
Revenue from the group&rsquo s Ukraine, Kazakhstan and CIS segments was up in 3QFY2024 due to higher revenue from Kazakhstan following new revenue contributions from Tea House LLP, which became a subsidiary of the Food Empire in May.
Moving forward, the group says it is closely monitoring the macroeconomic environment and geopolitical events for challenges, which may potentially impact its business in the short term.
In the longer term, the group adds that it has put in place strategic growth plans in some of its fastest growing segments. Food Empire remains optimistic that these initiatives, which are supported by its continuous investments in brand-building activities, product innovation and new product launches,
The group is expected to continue to conduct periodic reviews and adjust its sales and pricing strategies to mitigate rising raw material costs.
Sudeep Nair, group CEO, says: &ldquo We believe Food Empire is well- positioned for future expansion in Asia where there is healthy economic growth, balancing some of the geopolitical challenges from our more traditional markets in Eastern Europe. Our diversification into ingredients manufacturing provides greater stability and control over the supply chain, while our investments in production capacity expansion for our own-brand products enable us to support increasing demand from key markets.&rdquo
MAINBOARD-LISTED Food Empire on Monday (Nov 11) posted an 11.4 per cent rise in revenue to US$118.9 million for its third quarter ended Sep 30, from US$106.7 million a year ago.
This was mainly due to improved revenue growth across all its markets in Asia, led by South-east Asia, which had the highest revenue increase at 23.2 per cent, the instant coffee manufacturer said in a business update on Monday (Nov 11). It did not disclose net profit figures for Q3 FY2024.
For the nine months ended Sep 30, Food Empire&rsquo s revenue was up 12.8 per cent at US$344.3 million, from US$305.1 million the year before.
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RHB continues to like Food Empire as it expands its production in Vietnam
RHB Singapore continues to like Food Empire, as the research house maintains its &ldquo buy&rdquo call but with a new target price of $1.23, lower than $1.36 previously.
&ldquo We continue to like Food Empire for its strong balance sheet, cash generation ability, market share traction, valuation, and growth led by capacity expansion,&rdquo says analyst Alfie Yeo, who has cut FY2025 and FY2026 earnings on higher depreciation due to the construction of new plants.
The lower target price is based on 9x FY2025 P/E. This lower multiple accounts for revenue and margin headwinds including price challenges in Russia and elevated coffee prices.
The group is starting a new coffee manufacturing facility investment in Vietnam. It will be investing about US$80 million ($103.7 million) including working capital in a new freeze-dried soluble coffee manufacturing facility in Binh Dinh province, Central Vietnam.
This will be the group&rsquo s second factory and first ingredients production facility in Vietnam.
&ldquo It can tap on Vietnam as a leading producer of Robusta coffee beans for supply, to produce freeze-dried soluble coffee. The new facility will help to increase the production of freeze-dried soluble coffee, in addition to its existing manufacturing facility in India,&rdquo says Yeo.
This will help FEH to diversify and grow its ingredients business to become a key player in spray-dried and freeze-dried soluble coffee.
The facility is expected to be completed in early 2028. The group raised US$40 million of redeemable exchangeable notes from Ikhlas Capital, and Yeo believes that this will come in handy to help fund this Vietnam expansion.
This new facility is a long-term investment where production will commence only in 2028, but there is no revenue benefit before that, except for increased capex and depreciation, notes Yeo, who has imputed higher capex for FY2025 and FY2026, as well as increase depreciation expense assumptions marginally due to the construction of the new plants.
While Yeo is positive on Food Empire&rsquo s long-term growth, supported by higher production in Malaysia, Kazakhstan, and Vietnam, he remains cautious on elevated coffee prices, the interest expense on notes issued to Ikhlas Capital and its conversion price of $1.09, as well as the short-term challenges of raising product prices in Russia.
Other risks include a disruption in operations due to the Russia-Ukraine conflict, and the negative effect of a change in the value of the Russian and other CIS countries&rsquo currencies.
Food Empire to invest US$80 mil in new Vietnam freeze-dried soluble coffee manufacturing facility
Food Empire Holdings has announced its plans to invest US$80 million ($104.2 million) in a new freeze-dried soluble coffee manufacturing facility in Vietnam.
The facility, located in Binh Dinh province, marks the group&rsquo s second manufacturing facility for freeze-dried soluble coffee.
According to the group, the investment is part of its ongoing diversification strategy to grow its ingredients business. Under its ingredients business, the group currently operates two facilities in India that manufacture spray-dried and freeze-dried soluble coffee, as well as a non-dairy creamer manufacturing facility in Malaysia.
Construction of the new facility is set to begin in the first quarter of 2025. The facility is expected to be completed by early 2028.
The group adds that the location in Vietnam is &ldquo strategic&rdquo as the country is one of the world&rsquo s largest producers of Robusta coffee beans.
The new facility will have a larger capacity than the existing freeze-dried soluble coffee manufacturing facility in India.
The investment comes on the back of the group&rsquo s strategic focus on Asia. In May, the group announced its first coffee-mix production facility in Kazakhstan to be opened by the end of 2025.
In August 2024, it established a strategic partnership with Ikhlas Capital for the purpose of expanding the Group&rsquo s Southeast Asia and South Asia business segments.
Sudeep Nair, CEO of Food Empire, says: &ldquo Growth from our Southeast Asia segment, and in particular, Vietnam, has been the highest in recent years. We believe there is tremendous potential for even more growth and that is why we are putting focus in the region.&rdquo
He adds: &ldquo The new Vietnam facility will not only enable us to continue with vertical expansion as part of our diversification strategy, but it will also open up new business opportunities within Southeast Asia.&rdquo
The investment will be funded by internal resources and bank borrowings.
UOBKH downgrades Food Empire to &lsquo hold&rsquo on narrowing margins
Its analysts also lower their dividend forecast to S$0.05 per share
UOB Kay Hian (UOBKH) has downgraded its call on food and beverage company Food Empire to &ldquo hold&rdquo from &ldquo buy&rdquo , and reduced its target price to S$1 from S$1.30.
This comes as the research house believes that the price hikes and price disruptions for coffee beans triggered by the Russia-Ukraine war would continue to lower the company&rsquo s margins.
Analysts John Cheong and Heidi Mo on Wednesday (Sep 4) said Food Empire will need time to stabilise prices to maintain revenue and margins, before it can raise prices in the Russian market.
They expect the company&rsquo s gross margins from 2024 to 2026 to remain muted at 29 to 30 per cent.
The analysts also shaved their dividend forecast for Food Empire to S$0.05 per share, from S$0.10 per share.
This followed the company&rsquo s first-half financials released on Aug 12, when it posted an 11.3 per cent year-on-year drop in net profit to US$23.6 million.
The decline, which was in line with UOBKH&rsquo s expectations, was a result of lower profit contributions from its Russian market.
Revenue generated from this market fell 3.6 per cent in H1 ended Jun 30, mainly due to the depreciation of the Russian rouble against the US dollar (USD), and excess stock levels.
This currency devaluation, along with high inventory levels, is expected to weigh on Food Empire&rsquo s near-term performance, because customers will take time to deplete their stockpile, said Cheong and Mo.
They added: &ldquo Exchange rate volatility may continue to negatively affect revenue, particularly from Russia, as the rouble/USD rate continues to remain weak at 90.9 across July to August 2024.&rdquo
The analysts added that the new target of S$1 is pegged to 8.7 times the FY2024 price-to-earnings estimates, at 0.5 standard deviation below the long-term historical mean.
Given Food Empire&rsquo s plans to expand its manufacturing footprint, both Cheong and Mo continue to like the stock as they are positive on its growth prospects in South-east Asia and South Asia.
Citing Allied Market Research, they noted that South-east Asia is projected to clock a compound annual growth rate (CAGR) of 3.7 per cent to US$6 billion by 2029. South Asia is expected to grow 6.7 per cent CAGR to reach US$900 million in the same year.
&ldquo Given Food Empire&rsquo s growing market presence in these markets, we think that it is well-positioned to meet the rising global demand for instant coffee,&rdquo they said.
If Trump wins then Russia will benefit and South East Asia will worsen. So exactly the wrong scenario for the company' s current strategy.
Asia to be Food Empire&rsquo s top brew as coffee giant percolates expansion plans
In doing so, the group aims to balance the risks associated with geopolitical instability and currency volatility, particularly in its traditional markets of Russia and Eastern Europe
FOOD Empire will be deepening its roots in South-east Asia and Central Asia, as the instant-coffee maker looks to brew up the next wave of growth.
The mainboard-listed company intends to ramp up its investments in these regions, banking on their relative economic stability and burgeoning consumer markets.
&ldquo The geopolitics and a lot of currency volatility (in Europe) was primarily a reason why we looked to Asia, because this region has been more stable for us,&rdquo chief executive officer Sudeep Nair told The Business Times.
&ldquo What you see is the work of the last decade,&rdquo Nair said. &ldquo There has been a major diversification effort, which the group (started) from 2010, 2012 onwards.&rdquo
Over the next three to five years, seven of every 10 dollars that Food Empire : F03 0% invests for growth will be directed towards Asia, he added.
This comes as sales from South-east Asia are poised to overtake those of Russia as the group&rsquo s top revenue source within the next 12 to 24 months.
&ldquo Currently, you would see in our reporting that Russia comes in as the top single market,&rdquo Nair said. &ldquo But (our) South-east Asian investments and markets have been growing for us at a faster pace.&rdquo
For the six months ended Jun 30, sales from South-east Asia posted a 34.8 per cent rise to US$61.8 million, from US$45.9 million in the year-ago period. This was just behind the US$68.1 million in sales from Russia, which fell 3.6 per cent year on year due to the depreciation of the Russian rouble against the US dollar.
In total, Food Empire posted sales of US$225.2 million, up 13.6 per cent from US$198.2 million. Net profit fell 11.3 per cent to US$23.6 million, from US$26.7 million previously, due mainly to lower profit contributions from its Russia operations.
Yet, in local currency terms, the group actually registered revenue growth of 13.4 per cent in Russia during the same period, Nair noted.
&ldquo Coffee is a commodity which is priced &ndash whether you like it or not &ndash in US dollars,&rdquo he explained. &ldquo So these currency volatilities &ndash when they happen, we will try to increase the prices, but we do it gradually, so that the consumer and the retailers get adjusted to the new realities.&rdquo
South-east Asian growth
In South-east Asia, Food Empire currently has a business-to-consumer sales presence in Vietnam and business-to-business operations in Malaysia.
Last month, the group announced a US$40 million tie-up with Asean-focused private equity fund manager Ikhlas Capital.
&ldquo Ikhlas is a very well-established fund in this region,&rdquo Nair said. &ldquo Since we are focused here, it would be good to have a partner who&rsquo s very specialised in Asean they have very good networking and knowledge of almost all the countries where we would like to operate, or where we are operating.&rdquo
While the group has been actively shopping for acquisition targets in the region, &ldquo what we see in most of Asia is that the valuations have been stretched&rdquo , he noted.
The funds from Ikhlas&rsquo s capital injection &ndash structured via five-year redeemable exchangeable notes &ndash will likely be tapped for projects in Vietnam, along with expansions in South Asia.
That is because Vietnam &ndash where the group&rsquo s Cafe Pho coffee brand has gained significant market share &ndash stands out as a particularly strong performer, Nair said.
It is the fastest-growing market for Food Empire, outpacing other regions with the highest percentage growth in the company&rsquo s portfolio.
This was on the back of strategic investments in advertising, promotions, and an expanded sales force in Vietnam.
In the first half of this year, selling and marketing expenses rose by 10.4 per cent to US$17.4 million, due mainly to higher manpower costs, particularly from the group&rsquo s Vietnam operations.
Said Nair: &ldquo Vietnam has been the fastest growing market within Food Empire, right? A lot of this growth has come from salespeople we have invested in a lot of manpower, (and) we have created more teams to go deeper into distribution and consumer activities.&rdquo
The group has also expanded its capacity in Malaysia, where it has bolstered its production of non-dairy creamers &ndash a critical component of its coffee mix products.
This expansion is part of a broader strategy of vertical integration, Nair said, which will provide greater stability and control over its supply chain.
Central Asia expansion
In Central Asia, Food Empire is ramping up its presence with a US$30 million coffee mix production plant in Kazakhstan.
This facility, which is expected to become operational by end-2025, will serve as a hub for the entire Central Asian region, including Uzbekistan, Azerbaijan, and Tajikistan.
By localising production, Food Empire aims to reduce reliance on exports from its plants further afield, which improves efficiency and mitigates risks associated with long-distance logistics and cross-border trade.
The Kazakhstan plant is also part of the company&rsquo s broader strategy to capture a larger share of the growing consumer markets in Central Asia, where it already has a significant market presence.
For instance, Food Empire&rsquo s coffee mix products have over 70 per cent market share in Kazakhstan, Nair noted.
&ldquo We could supply from this plant the entire Central Asia (region), rather than supplying it from Malaysia &ndash which is very far &ndash and there would be certain tax benefits (from doing so),&rdquo he added.
Maintaining market share
As Food Empire continues to expand its Asian footprint, it is also balancing the risks associated with geopolitical instability and currency volatility, particularly in its traditional markets of Russia and Eastern Europe.
The company&rsquo s diversification into South-east Asia and Central Asia is a deliberate strategy to mitigate these risks, Nair said.
Indeed, Food Empire&rsquo s primary objective in Europe is to defend its existing market share, rather than pursue ambitious new projects.
&ldquo We don&rsquo t say: &lsquo Let&rsquo s go ahead and put in US$50 million and do something&rsquo . We don&rsquo t talk in those terms for (Europe),&rdquo Nair said.
&ldquo Whereas in Asia, we can do that, and say: &lsquo Let&rsquo s go ahead with this project.&rsquo &rdquo
KGI cheers Food Empire&rsquo s higher capacity and continued growth despite headwinds
KGI Securities analyst Tang Kai Jie has maintained &ldquo overweight&rdquo on Food Empire Holdings F03 0.00% with a target price of $1.35.
This is despite the company facing several headwinds in the near term, namely rising cost of raw materials and strong US dollar.
Tang notes that coffee prices had been rising since the start of April, reaching a high of US$240 per pound. The current level remains elevated, attributed to weather concerns in key coffee-producing regions, such as a forecast of near-freezing temperatures in the near future which may harm the supply of coffee.
&ldquo Prices of coffee have gone up significantly compared to 1HFY2023, where coffee prices averaged around US$175 per pound. This increase in coffee prices will continue to bring about a higher cost of production for Food Empire.
&ldquo Furthermore, the increased prices have also resulted in a price disruption of goods as retailers rebalance their inventories to maximise their profits. The company is gradually adjusting its selling prices, passing higher costs on to customers to maintain profit margins,&rdquo Tang says.
Meanwhile, the prolonged high interest rate environment has strengthened the US dollar, compared to local currencies in Food Empire&rsquo s key market. The Russian Ruble continued to depreciate against the US dollar compared to 1HFY2023, resulting in a lower y-o-y revenue growth rate for the Russian market after the foreign exchange conversion.
Against this backdrop, Food Empire continued strong growth in Southeast Asia and South Asia, Tang points out. The company saw a sustained increase in sales across its core markets in 1HFY2024 &mdash showcasing a resilient consumer demand for its products, which saw volume growth y-o-y.
Food Empire also continues to reap the benefits of its brand-building efforts in Vietnam, increasing its market share across the Vietnamese market.
The company has recently completed the expansion of its non-dairy creamer production facilities in Malaysia, KGI highlights. Commercial production started on April 1, boosting production of non-dairy creamer going forward.
&ldquo The plant will reach full production capacity over the next 24 to 36 months and will drive more growth for the group&rsquo s Southeast Asia region and translate into higher revenue for the group in the region,&rdquo says Tang.
Food Empire to receive US$40 million from Ikhlas Capital under strategic partnership
The capital injection would go into a special-purpose vehicle owned by Food Empire, in exchange for five-year redeemable exchangeable notes at 5.5% annual interest
FOOD Empire Holdings will receive a capital injection of US$40 million through a strategic partnership with private equity fund manager Ikhlas Capital.
In a bourse filing on Tuesday (Aug 20), the F& B manufacturing and distribution company announced that Ikhlas Capital would inject the funds into a special-purpose vehicle wholly-owned by Food Empire, in exchange for five-year redeemable exchangeable notes at 5.5 per cent annual interest.
Both parties signed a non-binding term sheet in June regarding the notes.
The vehicle will hold or have the option to hold a portfolio of business operations, including the group&rsquo s business in South-east Asia and South Asia.
The notes are exchangeable for new ordinary shares in the capital of Food Empire at an exchange price of S$1.09 a share at any time 24 months after the closing date up to the maturity date they are also convertible into new ordinary shares in the vehicle&rsquo s capital.
The company said that the funds are expected to accelerate its plans in both regions by driving capital expenditure, as well as mergers and acquisitions.
The company noted that in the first half of this year, revenue from the South-east Asia and South Asia segments grew 34.8 per cent and 36 per cent, respectively. It further expects growth momentum to continue into the latter half of the year.
Food Empire chief executive Sudeep Nair said: &ldquo As an Asean-focused fund with a dynamic network of investors and regional expertise, (Ikhlas Capital) are the best partners to support us as we shift our focus to South-east Asia and South Asia.&rdquo
FOOD Empire Holdings will receive a capital injection of US$40 million through a strategic partnership with private equity fund manager Ikhlas Capital.
In a bourse filing on Tuesday (Aug 20), the F& B manufacturing and distribution company announced that Ikhlas Capital would inject the funds into a special-purpose vehicle wholly-owned by Food Empire, in exchange for five-year redeemable exchangeable notes at 5.5 per cent annual interest.
Both parties signed a non-binding term sheet in June regarding the notes.
The vehicle will hold or have the option to hold a portfolio of business operations, including the group&rsquo s business in South-east Asia and South Asia.
The notes are exchangeable for new ordinary shares in the capital of Food Empire at an exchange price of S$1.09 a share at any time 24 months after the closing date up to the maturity date they are also convertible into new ordinary shares in the vehicle&rsquo s capital.
tonytony ( Date: 20-Aug-2024 22:54) Posted:
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Signed today !
Food Empire H1 profit falls 11.3% to US$23.6 million on Russia market weakness
Its revenue rises 13.6 per cent to US$225.2 million, from US$198.2 million a year earlier
FOOD Empire posted a 11.3 per cent drop in net profit to US$23.6 million for its first half ended Jun 30, 2024, from S$26.7 million in the previous corresponding period.
The food and beverage manufacturer saw lower profit contributions from its Russia market amid short-term price disruptions, it said in a regulatory filing on Monday (Aug 12).
The decrease was partly offset by higher profit contributions from its other segments, however, in spite of higher ingredient prices and operating expenses, including expenses related to brand building activities, the company added.
Earnings per share stood at 4.49 US cents for the half-year period, down from 5.03 cents the previous year.
Revenue for H1 rose 13.6 per cent to US$225.2 million, from US$198.2 million a year earlier. This was mainly driven by an increase in sales in its South-east Asia, South Asia, and Ukraine, Kazakhstan and Commonwealth of Independent States segments.
No dividend was declared for the half year, unchanged from the year before.
The company said Vietnam is its fastest-growing market in 2024 to date.
It also achieved higher revenue in Malaysia, due to increased demand from Middle East and East Asian markets, supported by higher production volume from its expanded non-dairy creamer factory in the second quarter of 2024.
Sudeep Nair, group chief executive of Food Empire, said: &ldquo We are very excited about the performance of our South-east Asia and South Asia segments, which have maintained a strong growth trajectory due to the successful execution of our business strategies...
&ldquo We intend to allocate more resources to these segments as part of the group&rsquo s plans to further develop our business there,&rdquo he added.
Food Empire half year results should be as good as Sheng Song and DFI. Hope to have dood dividend.
Agreed with you that the price is overvalued especially the broking houses.
New manufacturing plants in India. The Indians much much prefer tea. It would be that much more difficult to manage an operations in India.
New manufacturing plants in India. The Indians much much prefer tea. It would be that much more difficult to manage an operations in India.
tonytony ( Date: 09-Jul-2024 17:27) Posted:
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Still grossly over valued , below 0.80 then cam consider to buy. PE too high.
Pathetic stock, everyday goes down bit by bit. Haha
FY1H results maybe not in line with expectations due to forex or raw material,squeeze?