NAME: Food Empire Holdings Limited
TICKER: SGX: F03
MARKET CAP: SGD 317.5 Million (As of 29 Sep 2017)
MARKET PRICE / SHARE: SGD 0.595 (As of 29 Sep 2017)
SECTOR: Consumer Products
INDUSTRY: Instant Beverage & Food Ingredient
COMPANY PROFILE (Excerpt from Company’s Website):
SGX Mainboard-listed Food Empire Holdings
(Food Empire) is a global branding and manufacturing company in the food and
beverage sector. Its products include instant beverage products, frozen
convenience food, confectionery and snack food.
Food Empire’s products are sold to over 50
countries, in markets such as Russia, Ukraine, Kazakhstan, Central Asia, China,
Indochina, the Middle East, Mongolia and the US. The Group has 24 offices
(representative and liaison) worldwide. The Group operates nine manufacturing
facilities in India, Malaysia, Myanmar, Russia, Ukraine and Vietnam.
Food Empire’s products include a wide
variety of beverages, such as regular and flavoured coffee mixes and
cappuccinos, chocolate drinks and flavoured fruit teas. It also markets instant
breakfast cereal, potato crisps and assorted frozen convenience foods.
Without further ado, let’s jump into the
analysis of Food Empire Holdings (FEH).
Model & Economic Moat
As a food manufacturer, the one thing that
is of utmost importance is its branding. And for Food Empire, its strength lies
in its proprietary brands – including MacCoffee, Petrovskaya Sloboda, Klassno,
Hyson, OrienBites and Kracks.
MacCoffee – the Group’s flagship label –
has been consistently rated as the leading 3-in1 instant coffee brand in the
Group’s core market of Russia, Ukraine and Kazakhstan. In fact, Food Empire
holds a dominant 50% market share in the Russian instant coffee mix segment,
and the country is the Group's largest market, accounting for nearly 50% of total revenues in 2016.
The Group employs sophisticated brand
building activities, localized to match the flavor of the local markets in
which its products are sold. Check out this funny video for MacCoffee here. You can see more
of such advertisements here too.
On top of being the market leader in
Russia, Food Empire also successfully penetrated into Vietnam, becoming the
country's top five coffee players after making losses for many years. Today, Vietnam
accounts for the bulk of Food Empire's Indochina sales, contributing about 17% to group revenues.
Sourced from FY2016 Annual Report
That said, we pulled out the revenue mix
from the FY2016 annual report and realised that Russia’s market has been seeing
declining revenues even if you don’t factor in the oil crisis which impacted
Russia’s economy. Same goes for the Ukraine and Kazakhstan Markets.
On the other hand, we like how the
company’s revenue mix has been focused largely on ‘Beverages’ and ‘Ingredients’
(B2B sales). It means that FEH has stayed true to its core of selling the stuff
they have been good at all this time.
2) Growth Story
A solid growth story is hard to come by.
Fortunately for Food Empire, the growth drivers are easy to be determined:
Opening of instant coffee
manufacturing facility in India
Purchase stake in South Korea's
Rebound in FEH’s core markets
Earlier this year, it opened
a state-of-the-art instant coffee manufacturing facility in Andhra Pradesh,
India, which makes 10 different types and qualities of spray-dried instant and
granulated coffee. The instant coffee plant will aid FEH to accomplish 3 important things:
Expand its current coffee
Greater control over the supply
and production of raw materials.
Move up the value chain and
expands its coffee product offering
In addition, the Group has also acquired a
minority stake in South Korea's Caffe Bene, which has a network of more than
600 domestic franchise outlets, and another 100 in Malaysia, Taiwan, Mongolia,
Saudi Arabia and the US. You can read more about it here.
In case you are not aware, Caffe Bene has
been loss-making for the past few years due to its rapid expansion of stores
and high-profile advertising. Thus, FEH is probably looking at turning around
Caffe Bene using 2 approaches:
Tapping on FEH’s various
experiences and network connectivity into the global markets.
Supplying Caffe Bene with its
products (which may mean much higher
profits for FEH and lower costs for Caffe Bene).
Last but not least, the worst seems to be
over for FEH’s core markets - Russia, Ukraine and Kazakhstan.
After reporting losses for FY2014 and flat
earnings for FY2015, FEH registered a phenomenal jump in earnings come FY2016.
We are going to delve deeper into the figures and the revenue mix on our next
You probably would have given the company a
miss if you look at the last 5 years of the company’s sales and earnings. The
earnings have been on a drag due to the oil crisis which resulted in Russia’s rouble
devaluation (drop of 50% against USD!). Do check out my article on Motley Fool
Singapore (Fool.sg) here
Food Empire’s 10 Financial Years; Sourced
Looking at the graph above, the company
seems to be back from where it left off in FY2008 where it recorded a high of
S$29.2 mil profits.
That said, if you would just exclude this bumper
year (just before the financial crisis), I would say that FEH has been making
steady progress over the past years – 625%
increase in profits over 9 years.
On the other hand, what matters most is the
present and the future.
As per its latest 1HFY2017 results,
Russia and the Kazakhstan & CIS markets have been on a rebound. On the flip
side, Indochina has seen a slight 6.8% decrease due to intense competition which
leads us to wonder if it can continue to deliver strong growth rates in that
A bright spot can be spotted in the “Other Markets”, a jump in 49.7% sales which
stems from FEH’s downstream manufacturing plants. There is reason to believe
that this segment can be the next big thing for FEH if done correctly.
With that, let us zoom into its Balance
Sheet and Cash Flow taken from the 1HFY2017 report too.
We like how FEH is stocking up inventories in
anticipation of higher sales. That just goes to show that the management team
is confident about its own prospects!
To further add on to the highlighted above, FEH’s
borrowings stand at US$41.4 mil, which represents only about 0.25x total debt
to equity. On top of that, FEH churns out free cash flow of S$28 mil trailing
12mths Jun 2017.
The one key thing Warren Buffett looks for in
a company is a management team that he trusts. He once said, “In looking for
people to hire, you look for 3 qualities: integrity, intelligence and energy.
And if they don’t have the first, the other two will kill you”.
Thus, here we drill into FEH’s management
team and check out if they are shareholder-friendly and have their interests
aligned with yours.
First up, let’s look at the Executive
Chairman and CEO profiles:
They have been in the company for over 20
years and have clear boundaries. Executive Chairman Mr Tan is focused more on
the big global picture and more involved in the branding activities. CEO Mr
Sudeep Nair manages the day-to-day operations and is more active in the Russia
and CIS countries.
Yes, they also have their skin in the game
with both of them owning at least 6% of the company each. Mr Tan’s wife owns an
even greater interest of 12.66% as at 16th March 2017.
CEO Sudeep Nair has also displayed huge
confidence in the company’s turnaround by raking up 7.6 mil shares of the
company during Mar – May 2017. His highest purchase price is $0.67 which provides
a ‘floor’ to the share price.
More importantly is how the management team
responded to the collapse of the Russian rouble. Instead of brushing away the
incident as a one-off, Mr Tan looked at it as a transformative learning
This is what he said in an interview
"It taught us the importance of diversifying geographically, and over
the past few years, we've been venturing outside the Eastern European bloc into
Asia, as well as pursuing vertical
True to his words, FEH is making inroads
into Indochina and also acquiring Caffé Bene for more upstream sales in the
No investment is without risks and the same
goes for FEH. We look at the whole picture and zoom into some of the risks
Lackluster growth in Indochina,
Susceptible to consumers’
switching of products due to relatively cheaper items & similar product
offerings to that of competitors
Unable to turnaround the
loss-making Caffé Bene acquisition
High exposure to fluctuations
We feel that it could augur well for FEH if
they continue to expand their B2B operations through their Malaysia and India
plants. This way, they can dramatically reduce the risks mentioned in the
Our Take on Food Empire Holdings
Overall, we feel that
FEH’s competitive advantage will constantly be under siege from new competitors
and those with the ‘big guns’. As such, FEH has to either spend a lot on marketing
and advertising to maintain that edge or risk being cast aside when the
consumers find another better alternative.
The management team deserves a good
shout-out here as they have been navigating the company through several tough periods
and continued to strive for innovation. The company is currently in good financial
shape and is a classic turnaround story with impending growth catalysts.
We have tabulated these 5 pointers into
what we call: Pentagon Rating™ (see below).
We hope that you have a better
understanding of the stock through our analysis above. Happy Investing!~