Food Empire has reported higher revenue of 14.5% y-o-y in its 1QFY2024 business update. For the three months ended March, the company recorded a total turnover of US$117.5 million, up from US$102.6 million.

 

Sales booked in Russia, its single largest market, was weighed down by unfavourable forex movements, as the ruble depreciated against the reporting currency US dollar. However, in constant local currency terms, revenue increased by 27.4% in this market instead.

 

Food Empire enjoyed strong growth too in other key markets such as southeast Asia and South Asia, up 35.3% and 33% respectively.

 

&ldquo We will continue to capitalise on our strong brand equity and market leadership position to fine-tune our sales strategy across our markets so as to achieve our ultimate goal to balance topline growth with sustainable margins," says group CEO Sudeep Nair.

 

" With our healthy balance sheet and the lessons and experience gained over the years, we believe Food Empire is well-placed to ride out any market uncertainties and to capture opportunities along the way.

 

&ldquo The capacity expansion in our ingredient business is integral to our overall longer-term organic growth strategy as we seek to reinforce our leading position in existing markets, while exploring potential new geographical regions," he adds.

 

While keeping an eye on the potential impact from geopolitics, Food Empire is cautiously optimistic about the outlook of its core markets as consumer response to marketing and promotional activities continues to be encouraging and sales remain robust. 

 

It will conduct periodic reviews and adjust its sales and pricing strategies to mitigate rising raw materials costs.

 

Food Empire says it is constantly exploring acquisitions that are " complementary and synergistic" to its growth strategy.

 

Analyst Jarick Seet has retained his " buy" call as he likes Food Empire' s " resilient" business model. The company, in his view, is also undervalued. 

Maybank Securities analyst Jarick Seet has lowered his target price on Food Empire to $1.30 from $1.68 previously as he expects the higher coffee bean prices to impact the company&rsquo s margins in the short term.

 

Prices for coffee beans have risen in the past two month to a high of US$240 ($324.99) per pound, which is up 30%. As at Seet&rsquo s report dated May 7, coffee bean prices have tapered down to a growth of about 10%.

 

Despite the short-term headwinds, Seet expects Food Empire&rsquo s management to gradually raise its product prices, although this will impact its financial performance around six months later.

 

As a result, Seet has also lowered his patmi estimates for the FY2024 and FY2025 by 15%. His new target price is pegged to a lower FY2024 P/E of 10 times from 11 times before.

 

However, the analyst has kept his &ldquo buy&rdquo call on Food Empire as he sees its revenue growth to be intact, especially in Vietnam where the company has refocused a lot of its marketing efforts on, especially in FY2023.

 

&ldquo Going forward, its non-dairy creamer expansion should add about US$20 million - $50 million of revenues in the next one to two years after it ramps up,&rdquo adds Seet.

 

On the whole, the analyst likes Food Empire&rsquo s business model, which has proven to be &ldquo resilient&rdquo . The analyst also remains confident in its management&rsquo s ability to execute its strategies.

 

&ldquo We still believe Food Empire is undervalued at 8.6 times FY2024 P/E and that the company&rsquo s share buyback will likely continue. Management will likely also continue to reward shareholders with attractive dividends,&rdquo he says.

CGS International analyst William Tng has kept his &ldquo add&rdquo call on Food Empire Holdings F03 -0.74% after he visited the company for an update on March 26. The analyst has also maintained his target price at $1.84, which is valued at 11.2 times Food Empire&rsquo s P/E for the calendar year (CY) 2025. The target price also represents 1.0 standard deviation (s.d.) above its five-year mean from FY2019 to FY2023.

 

In his report dated March 27, Tng sees that there is potential for Food Empire to improve its valuation to 14.4 times P/E and 2.0 s.d. above its five-year mean through two key ways. This can be done through the building of a new three-in-one coffee mix plant in Kazakhstan, where the company can grow its brand strength and products in the Commonwealth of Independent States (CIS) and Kazakhstan. The group is already seeing strong demand for its products in the region, notes Tng.

 

Next, Tng recommends that the company looks to growing its food ingredients business. As it is, Food Empire has already completed its expansion for its non-dairy creamer product in Malaysia. The analyst expects volume production to commence by 2QFY2024 ending June.

In India, Food Empire&rsquo s spray dry and freeze dry coffee plants are at full capacity and the company has indicated that it expects demand to remain strong.

 

&ldquo We think Food Empire can grow its food ingredients business into a bigger net profit contributor over the next five years via expansion with new plants for non-dairy creamer, coffee powder and potato snacks),&rdquo says Tng.

 

&ldquo [It can also] explore valuation uplift via dual listing in other exchanges where there is stronger interest in branded food and beverage companies,&rdquo he adds.

 

In October 2023, Food Empire announced that it is looking to conduct a dual primary listing of its shares on the Main Board of the Stock Exchange of Hong Kong (SEHK). The company has been listed on the Mainboard of the Singapore Exchange S68 0.43% (SGX) since April 2000.

 

Over the past 10 years or so, Hong Kong&rsquo s non-alcoholic beverage sector has fetched a premium of 105% to the Hang Seng Index (HSI) versus the 72% premium as at November 2023 when The Edge Singapore last spoke to Food Empire&rsquo s executive chairman, Tan Wang Cheow.

 

At the time, the same sector was trading at a 12-month forward P/E of 13.8 times versus the 10-year average of 22 times. In contrast, Food Empire trades at a forward P/E of just over 8 times and is at a discount to its global peers. The international beverage sector trades at a P/E range of 17.3 times to 30 times with a 10-year average of 23.7 times, while the international coffee segment trades at a P/E range of 18.1 times to 25.9 times with a 10-year average of 22 times.

 

Higher dividend expectations

 

While Tng has kept his earnings estimates unchanged, he has raised his dividend per share (DPS) estimates for FY2024 to FY2026 by 53.2% to 74.8% after assuming a payout ratio of 45.0%. The new estimates assume more &ldquo attractive&rdquo dividend yields of 5.05% to 5.75% over the FY2024 to FY2026.

 

Tng&rsquo s new assumptions is higher than his previous base case of 5.0 cents a year, representing a &ldquo conservative&rdquo payout ratio estimate of 25.7% to 29.4% over the same period.

 

In FY2023, Food Empire declared a total dividend of 10 cents per share comprising a final and special dividend of 5 cents each.

 

&ldquo In terms of dividend scenarios, we think Food Empire can consider declaring interim dividends so that shareholders can enjoy a share of the company&rsquo s excess cash twice instead of having to wait till the full-year results (FEH currently only declares full-year dividends),&rdquo says Tng.

 

&ldquo Food Empire can continue to remain attractive as a dividend-yield stock,&rdquo he adds.

 

Other factors behind Tng&rsquo s call include the company&rsquo s potential to grow its operations in Vietnam into a new major revenue contributor. Its potential to grow its food ingredients business, as well as the end of its major capital expenditure (capex) cycle in FY2023, allowing Food Empire to improve its dividend payout, are other reasons.

 

Food Empire Holdings, fresh from reporting record earnings, has been steadily buying back shares on the open market this past month.

 

The most recent was on March 25 when the company acquired 100,000 shares at $1.345 each. This brings the total bought back under the current mandate to more than 9 million shares, equivalent to 1.69% of the company.

 

Before this transaction, the company was buying actively between March 6 and March 22, paying an average of between $1.36 and $1.40 each share for between 100,000 and 150,000 shares each day.

 

On Feb 27, Food Empire reported earnings of US$29.8 million ($40.05 million) for 2HFY2023 ended December 2023, down 9.6% from US$33 million in 2HFY2022, which was lifted by a one-off gain of US$15 million from the sale of a property. Excluding this item, Food Empire&rsquo s normalised earnings for 2HFY2023 would be up 65.7% over 2HFY2022.

 

The company was able to generate higher sales across most of its major markets. While sales in Russia, its single-largest market, dropped, overall sales increased by 6.9% to US$425.7 million, thanks to improvements seen in South Asia, Southeast Asia, Ukraine and other former Soviet states.

 

Food Empire plans to pay a record dividend of 10 cents for FY2023, consisting of a first and final dividend of 5 cents each, versus just 4.4 cents paid for FY2022. In its earnings commentary, Food Empire warns it is dealing with higher ingredient costs but believes demand for its products will remain strong across multiple markets.

 

Buying back shares for cancellation

Yangzijiang Financial Holdin YF8 -1.54% g has maintained a steady pace of buying back its own shares on the open market and has recently cancelled the shares it had bought back. The most recent was on March 26 when it acquired 599,200 shares at 32 cents each, and on March 25, when it bought 429,000 shares at 32 cents each. This brings the total number bought back under the current mandate to 159.4 million shares, equivalent to 4.338% of the total share base of 3.52 billion shares.

 

Earlier in the month, Yangzijiang Financial bought back around 24.7 million shares in total. The quantum bought back each time ranges from 549,900 shares on March 8 to more than 15 million shares on March 15. Throughout, the company paid around 32 cents each for these shares.

 

Yangzijiang Financial&rsquo s share buyback has been going on for some time. On March 7, the company cancelled 276.6 million treasury shares worth $105.27 million bought back earlier, bringing the number down from 410.25 million to 133.6 million and the percentage of treasury shares against total shares down from 11.6% to 3.78%.

 

In its original reiteration as the finance and investment arm of Yangzijiang Shipbuilding, Yangzijiang Financial&rsquo s main business has been to give short-term loans to Chinese companies. With the separate listing, it is focusing more on investments managed out of China instead, using Singapore as the base.

 

For example, it set up a maritime fund to capture various financing and leasing opportunities in shipbuilding, which is enjoying a boom now. The fund size has been increased from the planned US$500 million to US$600 million. Meanwhile, the company&rsquo s proportion of non-performing loans for its China debt investment has stayed at above 40% in FY2023.

 

On Feb 28, the company reported FY2023 ended December earnings of $201.8 million, up 25% from $162 million in FY2022. Total income in the same period increased by 26% to $348.4 million. The company plans to pay a dividend of 2.2 cents, up from 1.8 cents paid in FY2022. At this level, the payout ratio was 40%, as guided. As at Dec 31, 2023, the company&rsquo s net asset value was $1.0662, up from $1.0495 as at Dec 31, 2022.

Analysts have raised their target prices for Food Empire Holdings after the instant coffee maker reported record core record FY2023 earnings and dividends. 

 

With ongoing growth in demand that is being met by additional capacity,   analysts are optimistic that the company' s earnings will further improve.

 

On Feb 27, the company reported that FY2023 revenue increased by 6% y-o-y of US$425.7 million, led by stronger demand from its key markets including the former Soviet states, southeast Asia and south Asia.

 

Net margins between FY2022 and FY2023 improved from 11.3% to 13.3%, which helped drive core net profit surged to a record 25.3% y-o-y to US$56.5 million.

 

The company plans to pay a record dividend of 10 cents per share - consisting of a final and special dividend of five cents each, representing a payout ratio of 70%. In contrast, Food Empire paid just 4 cents for FY2022.

 

In his Feb 28 note, Maybank Securities analyst Jarick Seet projects further earnings growth, with a key driver from Food Empire' s non-dairy creamer business where new capacity has been added. 

 

He estimates this can potentially add between US$20 and US$40 million in revenue in the next 1 to 2 years, fetching a net margin of between 8 and 10%.

 

" In addition, demand from core markets remains strong which should drive revenue growth of 5-10% consistently y-o-y," says Seet, who is expecting a new earnings record for the current FY2024.

 

Having raised his FY2024 earnings estimate by 17.3% and FY2025' s by 14.5%, Seet has derived a new target price of $1.68, based on 11x FY2024 earnings.

 

Despite raising selling prices during the year, the company managed to move a bigger volume of products. To UOB Kay Hian analysts John Cheong and Heidi Mo, this price inelasticity is a testament to Food Empire' s strong brand equity. 

 

The company was also able to overcome the worst effects of the unfavourable currency movements.

 

" Hence, we forecast higher earnings and margins moving forward," state Cheong and Mo, with a new target price of $1.69, up from $1.63 previously.

 

Similarly, Alfie Yeo of RHB Bank Singapore, who has kept his " buy" call, believes that Food Empire can defend its margins by adjusting prices.

 

Thus, with higher revenue seen, he has raised his earnings projection for the company by between 5 and 7% for the current FY2024 and coming FY2025. Yeo' s new target price is $1.75, up from $1.53 previously.

 

William Tng of CGS International says his " add" rating is premised on Food Empire' s potential to grow its operations in Vietnam as a new major revenue contributor and also further growth in the food ingredients segment.

 

Also, the end of its current major capex cycle in FY2023 means there' s more room for Food Empire to improve its dividends, although for now, Tng' s " prudent" projection is that it will maintain ordinary dividends at 5 cents per share but with flexibility for special dividends.

 

Tng' s new target price of $1.84, up from $1.69, is based on 11.2x FY2025F earnings, which is 1.0 s.d. above its 5-year mean.   

 

Food Empire Holdings has reported earnings of US$56.5 million ($75.9 million) for the FY2023 ended Dec 31, 2023, 6.0% lower than the US$60.1 million reported in the FY2022. The lower earnings come despite the record full-year revenue due to the inclusion of the one-off US$15.0 million disposal gain recorded in the year before.

 

Excluding the gain, the company&rsquo s normalised net profit after tax marked a 25.28% increase from FY2022&rsquo s earnings of US$45.1 million.

 

FY2023 revenue stood at a record US$425.7 million, 6.9% higher y-o-y, mainly due to higher volumes and, or higher average selling prices (ASPs) and in spite of the depreciation of the Russian ruble and Ukrainian hryvnia against the US dollar (USD). In South Asia, the company&rsquo s higher revenue stemmed from higher contribution from its freeze dry coffee plant in India.

 

Gross profit surged by 19.0% y-o-y to US$141.5 million. Gross profit margin (GPM) rose by 3.4 percentage points y-o-y to 33.2%.

 

Earnings for the 2HFY2023 fell by 9.6% y-o-y to US$29.8 million, although without the one-off disposal gain, 2HFY2023 earnings would&rsquo ve been up by 65.6% y-o-y.

 

Revenue for the six-month period rose by 2.9% y-o-y to US$227.5 million.

 

Gross profit was up by 7.6% y-o-y to US$71.9 million, while GPM rose by 1.4 percentage points y-o-y to 31.6%.

 

For the period, Food Empire proposed a record dividend of 10 cents per share, comprising a first and final dividend of five cents and a special dividend of five cents. The dividend, if approved, will be paid on May 17.

 

As at Dec 31, 2023, cash and cash equivalents stood at $131.3 million.

 

Looking ahead, Food Empire expects demand for its products to remain strong across multiple geographies. That said, some of the prices of its ingredients &ndash such as robusta coffee, which it uses in its branded coffee mix business &ndash is at a historical high.

 

Demand also remains resilient in Russia and Ukraine despite the potential volatility in the exchange rate. Meanwhile, the company says it continues to see growth in Kazakhstan and the Commonwealth of Independent States (CIS) due to strong consumer demand.

 

Vietnam is also looking to show &ldquo promising growth&rdquo thanks to targeted advertising and promotions. In Malaysia, Food Empire has completed its non-dairy creamer expansion, which is expected to begin in the next few months once it has obtained the final approval from the Malaysian government.

 

In India, Food Empire&rsquo s spray dry and freeze dry coffee plants have operated at full capacity and are expected to continue to enjoy strong international demand.

 

Food Empire has drawn a query from the Singapore Exchange for unusual trading activity.

 

Over the past year, its shares have gained 90%, as the company was able to report better numbers selling instant coffee and other products to emerging markets such as Vietnam and also Europe.

 

Analysts are expecting the company to report record earnings for FY2023.

 

The company is also eyeing another listing on the Hong Kong market, which is up today following news that China is readying a sizeable stimulus package.

 

In its response around five hours after SGX' s query, Food Empire notes that it had on Oct 16 announced its intention to seek the dual primary listing.

 

" Other than the above, the company is not aware of any information not previously announced concerning the company, its subsidiaries or associated companies which might explain the recent trading," adds Food Empire.