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 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.

 

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

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.

 

Proceeds from the new strategic partnership with Ikhlas Capital and proposed note issuance will be used to drive Food Empire&rsquo s capital expenditures

 

FOOD and beverage manufacturer Food Empire signed a non-binding term sheet to issue Asean private equity fund manager Ikhlas Capital Singapore up to US$40 million in redeemable exchangeable notes.

 

Ikhlas Capital is licensed by the Monetary Authority of Singapore with on-ground presence in Singapore, Kuala Lumpur, Jakarta and Manila.

 

The fund manager focuses on growth, transformation and cross-border value creation.

 

Ikhlas Capital&rsquo s investment will be made into a special purpose vehicle (SPV) that is wholly owned by Food Empire.

 

It will come with the option to hold a portfolio of business operations, including Food Empire&rsquo s South-east Asian and South Asian businesses.

 

On Monday (Jun 24), the mainboard-listed group said it intends to expand its business in these regions through its partnership with Ikhlas Capital.

 

As Food Empire&rsquo s strategic investor, Ikhlas Capital will inject an initial US$40 million capital in the SPV via a five-year redeemable exchangeable note, and a 5.5 per cent annual interest based on terms and structures to be finalised in a definitive agreement.

 

The deal will give Ikhlas Capital the right, but not obligation, to exchange the notes into new Food Empire shares at S$1.09 apiece.

 

Proceeds from its new strategic partnership and proposed note issuance will be used to drive Food Empire&rsquo s capital expenditures, as well as mergers and acquisitions in South-east Asia and South Asia.

 

&ldquo The board believes that beyond capital injection, Ikhlas Capital&rsquo s local presence, knowledge and network in South-east Asia will help the group further accelerate growth and scale in South-east Asia and internationally,&rdquo said Food Empire.

 

It also highlighted Ikhlas Capital&rsquo s founding partners as &ldquo well-known Asean professionals who have spent a combined total of more than 100 years of their careers in the region, and are highly recognised leaders in their respective professional fields and countries&rdquo .

 

Among the co-founders of Ikhlas Capital is Nazir Razak, younger brother of former Malaysian prime minister Najib Razak.

 

Prior to co-founding the private equity fund manager, Nazir served as CIMB&rsquo s chairman from 2014 to 2018, after helming the Malaysian retail banking company as its group chief executive from 1999 to 2014.

 

Other co-founders include CDL Hospitality Trusts director Kenny Kim former Indonesian minister of trade Gita Wirjawan and Cesar Purisima, who served as the Philippines&rsquo secretary of finance during Benigno S Aquino III&rsquo s time as president until 2016.

 

RHB Bank Singapore&rsquo s Alfie Yeo has kept his &ldquo buy&rdquo call on Food Empire with an unchanged target price of $1.75, despite recent growing coffee prices and earnings cuts due to higher input costs. 

 

&ldquo We like Food Empire for its strong balance sheet, cash generation ability, market share traction, valuation, and share buyback initiative,&rdquo says the analyst. 

 

&ldquo Growth continues to be driven by capacity expansion of its ingredients business,&rdquo he adds. 

 

Yeo notes that coffee prices have increased by 26% from US$179 ($241.95) per pound to US$245 per pound currently since 2HFY2023. As coffee forms the bulk of Food Empire&rsquo s input, these sustained higher coffee prices could result in some pressure on margins going forward, he writes. 

 

The analyst adds that the company&rsquo s gross margins were subdued at under 30% when coffee prices reached a high of US$258 per pound in FY2022. Yeo anticipates slight margin pressure going forward given that the coffee price has rallied since 2HFY2023. 

 

In response, the analyst has reduced his gross margin assumption from 33.5%   to 33%, which is higher than previously given Food Empire&rsquo s stronger current portfolio as compared to FY2022. 

 

&ldquo That said, Food Empire is a brand company which can implement resizing (number of sachets) and repricing strategies to mitigate higher raw material prices,&rdquo adds Yeo. 

 

In light of these factors, the analyst has consequently lowered his earnings forecast for FY2024 - FY2026 by 3% each. 

 

Despite this, Yeo anticipates overall growth for Food Empire led by marketing and promotion strategies in various markets. With the addition of the company&rsquo s Malaysia operation commencing sales for its new non-dairy creamer production capacity from 2QFY2024, the analyst notes that management expects it to reach full utilisation in the next five to six years. 

 

Food Empire&rsquo s results for the 1QFY2024 ended March 31 was in line with the analyst&rsquo s estimates, increasing 14.5% y-oy to US$118 million. Growth was driven by the company&rsquo s key segments which include a 27.4% y-o-y revenue growth in Russia, Food Empire&rsquo s largest market. However, the analyst notes that due to the 23.6% depreciation of the Russian ruble against the American dollar, Russia recorded just 3.2% y-o-y revenue growth at US$39 million after conversion. 

 

The analyst also adds that Ukraine, Kazakhstan, and the Commonwealth of Independent States (CIS) segments grew 15.7% y-o-y to US$30 million, while South East Asia grew 35.3% y-o-y to US$30 million as well. 

 

&ldquo Overall, there were increased marketing and promotional activities, higher production volume growth from Malaysia and India manufacturing plants, and robust pricing strategy in key markets,&rdquo says Yeo. 

 

With the exception of a lower gross profit margin, the analyst&rsquo s forecasts remain largely unchanged. 

 

That said, potential downside risks to Food Empire&rsquo s earnings and margins identified by Yeo include disruption in operations resulting from the Russia-Ukraine conflict and negative effects from the change in the value of currencies from Russia and the CIS countries.

 

Food Empire' s environmental, social and governance (ESG) score sits at three (out of four), a slight drop below the country median of 3.1. As per RHB&rsquo s in-house proprietary ESG methodology, the analyst&rsquo s target price includes a 2% discount to Food Empire&rsquo s intrinsic value.