Tan Wang Cheow, executive chairman of Food Empire, explains how the coffee maker has navigated through multiple crises and outlines strategies for the upcoming growth phase

 

When the conflict between Russia and Ukraine broke out last February, shares of instant coffee maker Food Empire plummeted from 67 cents to 48 cents within a month, reflecting a typical knee-jerk reaction to adverse news. The prevailing logic suggested that Food Empire &mdash heavily reliant on revenue from both countries &mdash would inevitably face significant setbacks.

 

Surprisingly, Food Empire has defied these concerns. In its 1HFY2022 results announcement, the first after fighting broke out, the company revealed that sales of its coffee not only remained stable but increased. For the first half of the financial year 2022, ending in June, sales in Russia saw a 4.8% y-o-y increase, while revenue from Ukraine and other former Soviet states surged by 17.2% y-o-y. Sales have further grown since then.

 

Following the drop in February 2022,   Food Empire&rsquo s share price has steadily increased, gaining some 135% to close at a near-record high of $1.14 on Nov 15, valuing the company at $605.3 million.

 

With factories on both sides of the Russian and Ukrainian border, executive chairman Tan Wang Cheow hopes for an end to the conflict but acknowledges the geopolitical nature of the situation is beyond his control. To navigate uncertainty, he prioritises keeping the company agile and adaptable to market dynamics.

 

As a listed company for over 20 years, Food Empire has weathered various crises and market cycles. &ldquo There is always a &lsquo mini Black Swan&rsquo popping up,&rdquo says Tan in an interview with The Edge Singapore. For example, during the Global Financial Crisis, Food Empire scaled back its orders when faced with reduced demand. One supplier, eager to continue selling, had no choice but to stop production at his own factory due to the lowered volume required. &ldquo I probably lost about 5kg from the stress,&rdquo Tan adds. 

 

To address the issue in the long term, he opted to control raw materials by moving upstream. Food Empire diversified its revenue beyond coffee by becoming a contract manufacturer of potato chips for leading global brands in this segment.

 

Eye on Hong Kong, China

 

In its recent 9MFY2023 ended September business update on Nov 8, Russia was Food Empire&rsquo s single largest market, with other former Soviet states and southeast Asia contributing slightly lower revenue share. South Asia is another significant market. 

 

Tan believes significant growth potential exists in other emerging markets and has initiated steps to capture new business opportunities elsewhere. On Oct 16, Food Empire announced its intention to pursue a dual primary listing on the Stock Exchange of Hong Kong (HKSE). Through this move, the company aims to attract new investors, cultivate a more diverse shareholder base, and mobilise additional resources for potential expansion.

 

He stresses that Food Empire is keeping its Singapore Exchange S68 0.21% (SGX) listing and not decamping for Hong Kong for the purported higher valuation and better liquidity. &ldquo We are not going anywhere. We want more options with our dual listing in a different market.&rdquo  

 

Tan also highlights that the consumer sector ranks among the top-performing sectors in Hong Kong, and Food Empire aims to capitalise on this opportunity for future growth and investor interest. He further notes that numerous Hong Kong consumer stocks are familiar to regional investors.

 

Food Empire&rsquo s planned listing in Hong Kong could leave some upside for new investors. Over the past decade, the non-alcoholic beverage sector in Hong Kong has fetched a premium of 105% to the Hang Seng Index (HSI) versus the 72% premium today. Specifically, Hong Kong&rsquo s non-alcoholic beverage sector trades 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. 

 

Tan acknowledges that the market is not currently at its peak, but he encourages investors to view the potential Hong Kong listing as a growth opportunity over the short to medium term, anticipating market recovery.

 

For Food Empire, the possible Hong Kong listing is its gateway into the greater China market &mdash reaching investors and consumers. Its presence in Hong Kong and China is barely significant now. &ldquo There is a 1.4 billion population in China alone, and it is not something we want to miss out on,&rdquo he adds.

 

While there are no definite plans to share, Tan is not ruling out the possibility of forming joint ventures to penetrate this new market. He understands that entering this new market will entail substantial costs, but he sees it as a necessary and worthwhile commitment. &ldquo Sitting here and waiting for things to happen will not do us justice. I think we should do something rather than do nothing. There will be some costs, but we believe greater benefits will come out, much greater than the cost. We can be in better shape than we were before.&rdquo

 

Brave new worlds

 

Navigating new markets is a well-trodden path for Tan. When he gave his first interview to The Edge Singapore in June 2002, he recounted how he sold PCs in Russia in the 1990s, even though he was not fluent in the language. Having a good business acumen &mdash and perseverance &mdash matters more, evidently. 

 

The initial venture into Vietnam &mdash renowned for its rich coffee culture &mdash in 2004 faced challenges. The deeply ingrained preference for traditional Vietnamese drip coffee made it difficult for consumers to accept a foreign brand selling instant coffee.

 

In 2005, the company established a factory in Binh Duong province. The turning point came in 2013 with the introduction of Café Pho, an instant iced coffee product. Unlike traditional 15-minute drip coffee, the instant version quickly gained popularity for its convenient and swift preparation, resonating with consumers and restaurants.

 

The iced coffee segment was valued at approximately US$4 million during the Food Empire&rsquo s entry into the Vietnamese market. Now, Food Empire alone contributes to an annual sales revenue of US$60 million ($80.9 million) from the iced coffee segment in Vietnam. &ldquo We have replicated the traditional way of drinking coffee,&rdquo says Tan.

 

Revenue and inflation

 

Even though it is locally based, Food Empire has a limited presence in Singapore. However, Tan is pleased that its instant bubble tea brand is now available at the supermarket chain NTUC FairPrice.

 

Still, he has no plans for expansion in the Republic due to the intense competition in the market. &ldquo We use our HQ here to suss out for opportunities within the region there are a lot of M& A players and corporate advisors here. These guys will give us access to the rest of the region.&rdquo

 

Besides broadening its distribution and sales network globally, Tan has invested in expanding its manufacturing facilities in various markets. For instance, Food Empire opened its second coffee plant in India last year, which is now operating at nearly 100% capacity and has turned a profit in its first year.

 

Food Empire&rsquo s financial numbers have steadily increased. In pre-pandemic FY2019, it reported earnings and revenue of US$25.7 million and US$288.6 million, respectively. In 1HFY2023, earnings reached US$26.6 million, down 1.6% y-o-y. Revenue in the same period was up 11.8% y-o-y to a record of US$198.2 million due to higher volumes moved and higher pricing fetched from the various main markets.

 

In its 9MFY2023 business update, revenue rose to another record of US$305.1 million, up 6.7% y-o-y. The company attributes the higher turnover to a higher volume of products sold and at higher prices. The top line would have been higher if not for unfavourable forex, as the Russian ruble and the Ukrainian hryvnia depreciated against Food Empire&rsquo s reporting currency, the US dollar. 

 

Revenue for the 3QFY2023 dipped by 1.6% y-o-y to US$106.8 million, mainly due to the lower y-o-y revenue from its Russian segment. The lower y-o-y revenue from the company&rsquo s Russian market was due to the ruble&rsquo s depreciation against the US dollar.

 

For 9MFY2023 and 3QFY2023, earnings fell by 14.8% y-o-y to US$42.3 million and 30.6% y-o-y to US$15.7 million, respectively. The numbers were distorted by a one-off gain of US$15 million recorded in 3QFY2022 from the sale of its building at Harrison Road. The 9MFY2023 numbers were also weighed down by foreign exchange losses of US$1.4 million compared to a gain of US$3.6 million in the year before.

 

Despite forex volatility, Food Empire does not have an active hedging strategy. Instead, the company prefers to mitigate exposure to such risks by building its products and branding, gaining stronger pricing power and providing more flexibility.

 

Higher shipping costs

 

Besides forex, part of the inflationary cost pressures came from higher shipping costs. Tan recalls paying US$14,000 for a container, compared to the pre-pandemic cost of US$2,000. &ldquo When costs are that much higher, that will affect prices the minute they arrive at the port,&rdquo he adds.

 

Navigating inflation is not unfamiliar territory for Tan. In 2007, soaring oil prices created substantial cost pressures, prompting Food Empire to adapt its cost structure. Tan reflects: &ldquo We have proven over the years that, you know, despite currency changes or depreciation, we have been able to continue to grow through product innovation and gradual price adjustment.&rdquo  

 

He hopes that the inflationary and high interest rates will stabilise. &ldquo The only way to reign back the inflation is to increase the cost of funds. When the cost of funds increases, demand will go down. When demand comes down, people will produce less. That&rsquo s when you&rsquo ll have overproduction [of goods]. That&rsquo s when selling prices will go down. That&rsquo s what the government hopes to achieve. But we hope it won&rsquo t end in a recession,&rdquo Tan adds.

 

&ldquo Margins have been holding up pretty well because of its brand equity that it has built up over the years,&rdquo adds company advisor Foo Shiang Peow. &ldquo That is so because management can push the price due to its brand power.&rdquo

 

Buybacks and valuation

 

Food Empire has seen improved earnings, yet its current P/E at single digits suggests that the market has not fully acknowledged its value. While there are speculations about its potential as an acquisition target due to its modest valuation, Tan asserts that any such approach would be rebuffed. He has no plans to privatise Food Empire either.

 

Tan holds a 9.92% stake in the company, while his wife, Tan Guek Ming, a non-executive director, owns 11.99%, and CEO Sudeep Nair holds 12.45%. The largest shareholder is Anthoni Salim, chairman of Indonesia&rsquo s Salim Group, with a 25% stake. Tan describes Salim as a &ldquo supportive&rdquo partner, always ready to assist.

 

The modest valuation of Food Empire has impacted its business strategy. While seeking growth opportunities through acquisitions, the company has hesitated when potential targets demand valuations as high as 50 times earnings.

 

Meanwhile, Foo also says that one way Food Empire is trying to raise its valuation and beef up its returns is to buy back its shares as it taps its net cash balance of US$115.6 million.

 

He adds: &ldquo Unless, for compelling reasons, it will be more logical to buy back its own share than acquire others at a valuation higher than the company.&rdquo

 

As of Nov 16, Food Empire has bought back nearly 5.2 million of its shares from the open market under the current mandate, equivalent to 0.9747% of the share base. This brings the total bought back since 2019 to around 21 million.

 

&ldquo We will continue to buyback as long as we believe the share price is undervalued,&rdquo says Tan. 

 

Despite its relatively small market cap, Food Empire has garnered substantial sell-side coverage. Post the 3QFY2023 and 9MFY2023 results, analysts from CGS-CIMB Research, Maybank Securities, RHB Bank Singapore, and UOB Kay Hian have maintained a positive outlook on the company&rsquo s prospects. 

 

CGS-CIMB&rsquo s William Tng has kept his &ldquo add&rdquo call on Food Empire as its revenue and net profit for the 3QFY2023 and 9MFY2023 stood within his full-year estimates, and he sees the company on track to report record earnings for the whole of FY2023.

 

Tng&rsquo s positive rating for Food Empire considers its potential in Vietnam as a major revenue contributor, growth in the food ingredients business, and the completion of its capital expenditure cycle, enabling excess cash return to shareholders.

 

His target price of $1.69 is based on 11.2 times Food Empire&rsquo s FY2025 P/E or 0.1 standard deviation (s.d.) above its five-year average P/E of 8.2 times. 

 

Maybank Securities analysts Jarick Seet and Eric Ong have also kept their &ldquo buy&rdquo call on the back of Food Empire&rsquo s &ldquo solid&rdquo 3QFY2023 results, which stood &ldquo way above consensus&rdquo as well as above their estimates, thanks to strong demand from its core markets.

 

&ldquo We expect demand to remain strong and margins to improve in FY2024 as Food Empire raised prices by 8% during September to counter the ruble&rsquo s depreciation. As a result, we raise our FY2023 NPAT by 10.8% and lift FY2024&rsquo s by 10.5%,&rdquo they write. 

 

The analysts have also increased their target price to $1.60 from $1.36 as their valuation base is rolled forward to the end of FY2024 on an unchanged FY2024 P/E of 11 times.

 

&ldquo With another record financial year in the making, we expect management to continue rewarding shareholders with attractive dividends, potentially more than last year, resulting in a prospective yield of 4.8% for FY2023,&rdquo they add.

 

With the earnings above his expectations, RHB analyst Alfie Yeo has kept his &ldquo buy&rdquo call with a higher target price of $1.53 from $1.39.

 

&ldquo We continue to like Food Empire for its positive earnings momentum on the back of strong performance in 3QFY2023,&rdquo he writes. 

 

&ldquo While revenue aligned with our expectations, gross margins have outperformed. This has been largely due to better pricing and a change in operating model that reduces exposure to forex risks with suppliers.&rdquo

 

He adds: &ldquo As gross margins are now ahead of our forecasts, we now raise our gross margin assumptions from 30% to 34.5%, as we believe this would be sustainable going forward.&rdquo

 

Yeo has raised his earnings estimates by 7% to 8%. He sees Food Empire&rsquo s valuation as undemanding at [under] 8 times FY2024 P/E, i.e. -0.5 s.d. of its historical mean.

 

UOB Kay Hian analysts Heidi Mo and John Cheong, who have kept their &ldquo buy&rdquo call, have also increased their target price to $1.63 from $1.36.

 

Their new target price is pegged to 11 times the company&rsquo s FY2024 earnings at its long-term historical mean.

 

&ldquo Despite implementing pricing adjustments across most of its operating markets during the year, Food Empire&rsquo s sales volumes continued to rise, demonstrating the price inelasticity of its products.&rdquo

 

The UOB Kay Hian analysts add: &ldquo Additionally, Food Empire&rsquo s overall performance has surpassed our expectations in the face of currency devaluations in 9MFY2023.&rdquo &ldquo We believe this is [a] testament to its strong brand equity and experience in navigating currency fluctuations effectively.&rdquo

 

They expect further growth in its earnings as demand across its core markets stays robust.

 

The UOB Kay Hian analysts have also raised their FY2023 to FY2025 core earnings estimates by 8% and 6%, respectively, or to US$54 million ($72.9 million) for FY2023 and US$61 million for FY2025.

 

&ldquo With 9MFY2023 revenue reaching a record high despite currency headwinds, we believe that Food Empire has demonstrated its ability to deliver strong results and will continue to perform moving forward,&rdquo they add. 

 

Like their peers, Mo and Cheong expect Food Empire to pay a higher dividend for FY2023, given its performance. For FY2022, the company paid a total of 4.4 cents per share. 

 

MAINBOARD-LISTED Food Empire Holdings on Wednesday (Nov 8) posted a 30.6 per cent decline in net profit to US$15.7 million for its third quarter ended Sep 30.

 

This is down from US$22.6 million in the corresponding year-ago period.

 

The decrease in net profit was attributed to the absence of a one-off gain of US$15 million from the disposal of a non-core asset in Q3 2022, said the instant coffee manufacturer in a business update, though it added that this was partly offset by better operating profits and lower foreign-exchange losses.

 

Revenue for the quarter fell 1.6 per cent year on year to US$106.8 million from US$108.6 million. This was mainly due to lower contributions from the group&rsquo s Russia segment resulting from the depreciation of the Russian ruble, the group said.

 

It noted that all core markets including Russia had otherwise recorded higher revenue in local currency terms. Higher contributions from the group&rsquo s Vietnam and Kazakhstan segments, as well as its coffee manufacturing plants in India, also helped to offset the lower contributions from the Russia segment.

 

Operating profits rose 38.2 per cent to US$19.7 million for the quarter, up from US$14.3 million a year ago.

 

For the nine-month period ended Sep 30, net profit fell 14.8 per cent to US$42.3 million, from US$49.6 million in the year-ago period. Revenue came in 6.7 per cent higher at US$305.1 million, due to increased volumes and higher pricing from all of the group&rsquo s core markets.

 

Food Empire noted that the group is performing well in all its core markets and will continue to invest in strengthening its market position. However, it remains cautious as the global geopolitical situation continues to evolve, on top of facing currency volatility in all its key markets. &ldquo Despite higher raw material cost, we expect profitability to be maintained going forward,&rdquo Food Empire said.

INVESTORS might be expected to shun a consumer products company that derives the bulk of its revenue from countries embroiled in a war. 

 

But the stock price of instant-coffee maker , whose key markets include Russia and Ukraine, has surprisingly been on a tear over the past year.

 

The mainboard-listed company is now stirring up more excitement with its latest announcement in mid-October that it is exploring a dual primary listing in Hong Kong. 

 

A successful dual listing could mean better valuations for the stock. But there are some warning signs that it could be already overvalued.

 

With eight manufacturing facilities around the world, Food Empire&rsquo s array of food and beverage (F& B) products is sold in more than 60 countries. 

 

It is perhaps best known for its three-in-one MacCoffee brand, which the group&rsquo s founder and executive chairman Tan Wang Cheow once described to The Business Times (BT) as a household name in Russia.

 

On the face of it, Food Empire has the makings of a local stock poised to make an international name for itself. And investors here have perhaps bought into the company&rsquo s growth story. 

 

According to Bloomberg data, the counter has more than doubled its value over the past 12 months. With dividends reinvested, Food Empire has generated a total return of 117.1 per cent over the past year.

 

In the year to date, the stock has delivered a total return of 72.6 per cent. In comparison, total return for the benchmark Straits Times Index stood at negative 1.6 per cent over the same period.

 

Brewing troubles

In February last year, Food Empire&rsquo s auditor EY raised concerns about the financial, economic and social impact of the war on the company. 

 

This came as the escalation of the Russia-Ukraine war threatened to stifle the group&rsquo s growth. EY added that there was a possibility of impairments on Food Empire&rsquo s assets if the conflict persists. 

 

On its part, Food Empire also flagged uncertainties surrounding the conflict in its results updates and announcements. 

 

Yet, despite the prolonged war, the Singapore-listed counter has not wavered.

 

In its most recent financial results, for the first half ended June, Food Empire reported an 11.8 per cent rise in revenue to US$198.2 million. The increase came on the back of a combination of higher volumes and pricings across most of its key markets. 

 

Revenue from Russia, which accounted for over a third of Food Empire&rsquo s total revenue in H1, was up 23.6 per cent to US$70.6 million.

 

Revenue from its second-largest geographical segment &ndash Ukraine, Kazakhstan and the Commonwealth of Independent States, which accounted for about a quarter of total revenue &ndash rose 20 per cent to US$49.5 million. 

 

However, the stronger topline figures were offset by the depreciation of the Russian rouble and Ukrainian hryvnia against the US dollar, as well as lower revenue from Europe. 

 

This put a strain on the group&rsquo s H1 earnings, which fell 1.5 per cent to US$26.7 million. 

 

Still, on the return-on-equity (ROE) front, Food Empire has performed significantly better than its Singapore-listed peers. 

 

According to Bloomberg data compiled by BT, Food Empire&rsquo s ROE stood at 22.4 per cent &ndash putting it at the head of the pack. 

 

Only two other counters had ROE figures crossing the 20 per cent mark: palm oil players First Resources and Kencana Agri. ROE for confectionary company Delfi came close at 19.7 per cent. 

 

In comparison, ROE for F& B conglomerate Fraser and Neave stood at 4.3 per cent, and that of Gardenia bread-maker QAF was at 3.4 per cent. 

 

But other financial metrics suggest that Food Empire, which closed at S$1.05 on Oct 27, could already be overvalued. 

 

For example, its price-to-book ratio stood at 1.5 times. This is above its local peers&rsquo one-year average of 1.1 times and five-year average of 0.7 times, according to Bloomberg data. 

 

Meanwhile, it is trading at a price-to-earnings ratio of 6.8 times. This puts it close to the middle of the pack among its peers. 

 

Perking up in South-east Asia

However, RHB analyst Alfie Yeo believes Food Empire&rsquo s valuation is still &ldquo undemanding&rdquo .

 

Yeo flagged some potential risks for the company, including a disruption of operations due to the Russia-Ukraine conflict as well as currency swings.

 

Still, he remained bullish on the group&rsquo s operations in Vietnam, where it has established itself as the third largest three-in-one instant-coffee player.

 

RHB has a &ldquo buy&rdquo call on Food Empire with a target price of S$1.39.

 

&ldquo Vietnam is currently a significant contributor to Food Empire&rsquo s South-east Asian revenue,&rdquo Yeo said in a recent report. &ldquo Food Empire&rsquo s strategy to strengthen its market share with new product variants and further market penetration of its mainstay coffee product Cafe Pho should bode well and support future growth going forward.&rdquo

 

Revenue from South-east Asia &ndash Food Empire&rsquo s third largest geographical segment &ndash rose a modest 1 per cent to US$45.9 million in H1. This was mainly due to lower revenue from the Vietnam market partially offsetting higher contribution from the group&rsquo s non-dairy creamer and snacks manufacturing facilities in Malaysia.

 

The group also has a substantial presence in South Asia, where revenue jumped 15.3 per cent to US$21.7 million in H1.

 

Food Empire&rsquo s potential dual primary listing on the Hong Kong exchange could be interesting to watch.

 

In its Oct 16 announcement, the company said it believed the move would give it &ldquo a more diverse investor and shareholder base and additional sources of fund raising&rdquo as well as &ldquo enhance the company&rsquo s corporate profile and visibility in the international markets&rdquo .

 

But without significant operations in East Asia, it might be difficult for Food Empire to stir up interest in the Hong Kong market.

 

Food Empire Holdings is currently exploring a proposal to seek a dual primary listing of its shares on the Main Board of the Stock Exchange of Hong Kong (SEHK).

 

A dual primary listing is said to benefit the company in terms of providing it access to two equity markets in Singapore and Hong Kong. The dual listing will also provide the company with a more diverse investor and shareholder base as well as additional sources of fundraising.

 

&ldquo The consumer sector that the company operates in is among the top performing sectors in Hong Kong&rsquo s capital markets,&rdquo says Food Empire in its Oct 16 statement.

 

The proposed dual primary listing will also have more potential to increase the liquidity of Food Empire&rsquo s shares, enhance its shareholders&rsquo value and further enhance the its corporate profile and visibility in the international markets as the company seeks inorganic growth opportunities globally, it adds.

 

Quam Capital is the sole sponsor of the proposed dual listing while Quam Securities is the sponsor-overall coordinator in Hong Kong.

 

As at Oct 16, the company says that preparatory works are ongoing and no application has been made to the SEHK for the listing of its shares. No permission has been sought from the Singapore Exchange S68 -0.31% Securities Trading Limited (SGX-ST) either.

 

CGS-CIMB has started coverage on Food Empire with an &ldquo add&rdquo rating, which is premised on the food and beverage manufacturer&rsquo s growth and dividend prospects, as well as cheap valuations.

 

Its S$1.69 price target implies an 11.2 times price-to-earnings ratio based on FY2025 estimates, representing one standard deviation above the stock&rsquo s five-year average of 8.2 times.

 

The research house forecasts an earnings per share compound annual growth rate of 7 per cent from FY2022 to FY2025, and a dividend yield of 3.9 per cent over FY2023 to FY2025.

 

In an initiation report on Tuesday (Oct 3), CGS-CIMB analysts highlighted Food Empire as an &ldquo undervalued consumer staple company&rdquo that is trading significantly below its peer average.

 

&ldquo In our view, this is due to concerns over its revenue exposure to Russia and Ukraine, which has been in an armed conflict since February 2022. However, as 3-in-1 beverages are consumer staples and are priced for the mass market, the major fundamental impact on Food Empire has been foreign exchange rate movements.&rdquo

 

Highlighting Food Empire as a market leader in Russia, the analysts see room for the group to grow its business further in Vietnam and possibly expand into nearby markets such as Cambodia.

 

They also like the stock for its recent diversification into the food ingredients business, which they observed to have produced cost savings for the group, and in the process, improved its profit margins. Shareholders of Food Empire further stand to benefit from the group&rsquo s excess cash, dividend track record and its management&rsquo s continued share buybacks, added the analysts.

 

This comes especially as Food Empire nears the completion of its non-dairy creamer plant expansion in Malaysia to mark the end of its capital expenditure cycle, with the group in a net cash and positive free cash flow position as at end-June 2023.

 

Despite the possibility of a new plant being built in Kazakhstan, the analysts think the resultant capex would not affect the group&rsquo s ability to share excess cash with its shareholders. &ldquo In our view, the Kazakhstan plant, if Food Empire decides to proceed, is likely to be of a manageable magnitude and Food Empire will continue to be able to return excess cash to shareholders via dividends and continued share buybacks.&rdquo