Food Empire

[GreedandFear]

Let me kick this off with some comments on the company itself. Suffice to say, I find it to be at an interesting price point.

Brief Intro of the Company
Food Empire is a global branding and manufacturing company specialising in the food and beverage industry. The Group’s portfolio of products includes instant beverages, frozen convenience food, confectionery and snacks. Some of the most notable brands in their portfolio are that of instant coffees. Back in 2014, with the Russia Ukrainian conflict, international sanctions were levered on Russia. Coupled with a steep drop in oil prices, the Russian Ruble faced a sharp devaluation. In turn this resulted in Food Empire, which has its largest businesses in Russia and Ukraine, rack up losses for financial year 2014.

What's happening in 2019
The company has undergone an intensive diversification strategy since 2014 in a bid to avoid history repeating itself. In 2014, the percentage of sales coming from Russia + Ukraine amounts to 65.5%. In 2013, the same category took up 71.6% of revenue. In 2019 as of 1H19, Russia and Ukraine makes up 49.1% of sales with much higher contribution from other countries. The risk with Russian Ruble and Ukrainian Hyrvnia fluctuations still remains though less so. The company is currently undergoing rationalisation of underperforming segments (which in my interpretation is shutting down or reducing exposure to loss making segments). During the AGM in 2019, it was mentioned that in Myanmar itself, the company lost $4m in 2018. Subsequently, analyst reports were highlighting reductions in A&P costs in Myanmar and Philippines. I see a very similar scenario here to what had happened to Auric Pacific prior to its privatisation whereby it closed off loss making businesses in a rationalisation push (Delifrance etc).

Balance Sheet Strength
Net Asset Value of the Group is at USD$190.5m (SGD262m or 49.3 cents per share). Loans have increased in the past year to fund the building of a second instant coffee plant in India. At first glance, there is nothing to shout about with regards to balance sheet strength, but the fact that the share is trading near to book value for a consumer staple is notable (51.5 cents at the point of writing). The strong cashflow gives comfort in the ability in repaying the loan.

Earnings
Post rationalisation exercise, the trailing twelve months earnings come in at USD21.443m (SGD29.484m or 5.48 cents per share giving 9.4 P/E ratio). Close to home, Super Group was taken private at 32.69x PE Ratio and 16.10x EV/EBITDA with a mean on the comparable companies at 16.69x PER and 10.83x EV/EBITDA. Current EV/EBITDA ratio on Food Empire is at 6.93 x as per WSJ.com. Another interesting comparison, Power Root Bhd which is behind Ah Huat white coffee, is trading at 27.62x PER and 21.55x EV/EBITDA. I am not saying that Food Empire should be valued at those levels, but it goes to show that the current valuations are not demanding.


Catalysts for Profit Growth
The manufacturing facility in India is expected to commence operation in FY2020 (expansion of Indus Coffee manufacturing facility). If you look at the Annual Report, the segment under others is where the India instant coffee manufacturing facility's sales would go. That segment is has the highest profit out of all the segments, and has a high inter segment sales. I interpret the breakdown to mean that the ingredients business (both providing instant coffee powder as B2B raw ingredients business and providing them internally) is highly profitable. Commencement of the expanded facilities, would thus in my opinion provide a boost to earnings.

The Wildcard
Back in 2016, the company acquired a stake in Caffe Bene in a bid to diversify businesses and in the process hopefully create synergies in the coffee industry. The company was already in trouble for expanding too quickly and couldn't turn its fortunes around. It finally got approval for a court led rehabilitation scheme to help the company get out of insolvency. This included debt to equity swaps that resulted in the shareholding of Hallyu Ventures (Which Food Empire holds 51%) to be diluted to 37.6%. In Oct 2018, Caffe Bene graduated early from the rehabilitation scheme. However it is currently still registering losses as of 1H19 even though revenue seems to have stabilised from years of decline. From the whole boom and bust cycle, there used to be 600 stores in China alone, with the China JV now having gone bankrupt. The company seems to be actively managing the business such as reducing the franchising costs, tying up with well known brands to refresh the menus, and rebranding the name in Korea. Most importantly, Food Empire has fully written off the 18.8% ownership in Caffe Bene and holding the investment at zero. This is effectively a free option.

Insider Transactions and Share Buy Backs
The company has commenced share buybacks since 30 Sep. While share buybacks are not an indication of a share being undervalued (Lehman was buying back shares all the way till it went bust), insider transactions definitely indicate management's view that the business is undervalued. Mr Sudeep Nair has been buying shares over the years and increasing his shareholding of the company.

I would say that this is an opportune time to pick up a consumer staple business that's not embroiled in the US China Trade War and in my opinion undervalued at the current traded price.

Hi Squirrel.

I think that is a good summary. It is a company that I have been looking at, on and off, over the years. As you mention, it is trading at a very low multiple for a consumer goods company but that is probably also a reflection on its volatile markets. I failed to pull the trigger when it was trading in the 30s and the Russia business was recovering (a few years ago). As you mention, the CEO then aggressively bought shares and ramped to shares up to the 50s and it continued from there. Concerns that have held me back from investing :

1. The Caffee Bene acquisition that just seemed ill timed and ill advised
2. Their investment in building an office building in Singapore to not only house the company but also to generate income from renting it out. I think theis was three to four years ago. To me, that seemed like diversifying into "property investment" instead of focusing at what they are good at
3. If I remember correctly, Salim owns a major stake so they could veto any privatisation or trade buyer

NOT VESTED

[Squirrel]

Let me kick this off with some comments on the company itself. Suffice to say, I find it to be at an interesting price point.

Brief Intro of the Company
Food Empire is a global branding and manufacturing company specialising in the food and beverage industry. The Group’s portfolio of products includes instant beverages, frozen convenience food, confectionery and snacks. Some of the most notable brands in their portfolio are that of instant coffees. Back in 2014, with the Russia Ukrainian conflict, international sanctions were levered on Russia. Coupled with a steep drop in oil prices, the Russian Ruble faced a sharp devaluation. In turn this resulted in Food Empire, which has its largest businesses in Russia and Ukraine, rack up losses for financial year 2014.

What's happening in 2019
The company has undergone an intensive diversification strategy since 2014 in a bid to avoid history repeating itself. In 2014, the percentage of sales coming from Russia + Ukraine amounts to 65.5%. In 2013, the same category took up 71.6% of revenue. In 2019 as of 1H19, Russia and Ukraine makes up 49.1% of sales with much higher contribution from other countries. The risk with Russian Ruble and Ukrainian Hyrvnia fluctuations still remains though less so. The company is currently undergoing rationalisation of underperforming segments (which in my interpretation is shutting down or reducing exposure to loss making segments). During the AGM in 2019, it was mentioned that in Myanmar itself, the company lost $4m in 2018. Subsequently, analyst reports were highlighting reductions in A&P costs in Myanmar and Philippines. I see a very similar scenario here to what had happened to Auric Pacific prior to its privatisation whereby it closed off loss making businesses in a rationalisation push (Delifrance etc).

Balance Sheet Strength
Net Asset Value of the Group is at USD$190.5m (SGD262m or 49.3 cents per share). Loans have increased in the past year to fund the building of a second instant coffee plant in India. At first glance, there is nothing to shout about with regards to balance sheet strength, but the fact that the share is trading near to book value for a consumer staple is notable (51.5 cents at the point of writing). The strong cashflow gives comfort in the ability in repaying the loan.

Earnings
Post rationalisation exercise, the trailing twelve months earnings come in at USD21.443m (SGD29.484m or 5.48 cents per share giving 9.4 P/E ratio). Close to home, Super Group was taken private at 32.69x PE Ratio and 16.10x EV/EBITDA with a mean on the comparable companies at 16.69x PER and 10.83x EV/EBITDA. Current EV/EBITDA ratio on Food Empire is at 6.93 x as per WSJ.com. Another interesting comparison, Power Root Bhd which is behind Ah Huat white coffee, is trading at 27.62x PER and 21.55x EV/EBITDA. I am not saying that Food Empire should be valued at those levels, but it goes to show that the current valuations are not demanding.


Catalysts for Profit Growth
The manufacturing facility in India is expected to commence operation in FY2020 (expansion of Indus Coffee manufacturing facility). If you look at the Annual Report, the segment under others is where the India instant coffee manufacturing facility's sales would go. That segment is has the highest profit out of all the segments, and has a high inter segment sales. I interpret the breakdown to mean that the ingredients business (both providing instant coffee powder as B2B raw ingredients business and providing them internally) is highly profitable. Commencement of the expanded facilities, would thus in my opinion provide a boost to earnings.

The Wildcard
Back in 2016, the company acquired a stake in Caffe Bene in a bid to diversify businesses and in the process hopefully create synergies in the coffee industry. The company was already in trouble for expanding too quickly and couldn't turn its fortunes around. It finally got approval for a court led rehabilitation scheme to help the company get out of insolvency. This included debt to equity swaps that resulted in the shareholding of Hallyu Ventures (Which Food Empire holds 51%) to be diluted to 37.6%. In Oct 2018, Caffe Bene graduated early from the rehabilitation scheme. However it is currently still registering losses as of 1H19 even though revenue seems to have stabilised from years of decline. From the whole boom and bust cycle, there used to be 600 stores in China alone, with the China JV now having gone bankrupt. The company seems to be actively managing the business such as reducing the franchising costs, tying up with well known brands to refresh the menus, and rebranding the name in Korea. Most importantly, Food Empire has fully written off the 18.8% ownership in Caffe Bene and holding the investment at zero. This is effectively a free option.

Insider Transactions and Share Buy Backs
The company has commenced share buybacks since 30 Sep. While share buybacks are not an indication of a share being undervalued (Lehman was buying back shares all the way till it went bust), insider transactions definitely indicate management's view that the business is undervalued. Mr Sudeep Nair has been buying shares over the years and increasing his shareholding of the company.

I would say that this is an opportune time to pick up a consumer staple business that's not embroiled in the US China Trade War and in my opinion undervalued at the current traded price.

Hi Squirrel.

I think that is a good summary. It is a company that I have been looking at, on and off, over the years. As you mention, it is trading at a very low multiple for a consumer goods company but that is probably also a reflection on its volatile markets. I failed to pull the trigger when it was trading in the 30s and the Russia business was recovering (a few years ago). As you mention, the CEO then aggressively bought shares and ramped to shares up to the 50s and it continued from there. Concerns that have held me back from investing :

1. The Caffee Bene acquisition that just seemed ill timed and ill advised
2. Their investment in building an office building in Singapore to not only house the company but also to generate income from renting it out. I think theis was three to four years ago. To me, that seemed like diversifying into "property investment" instead of focusing at what they are good at
3. If I remember correctly, Salim owns a major stake so they could veto any privatisation or trade buyer

NOT VESTED

Just some of my thoughts on your points

1. Imho, the Caffe Bene venture was a really good addition to the business in a way that it vertically integrates the supply chain and allows exposure to more than a thousand branches at the peak. Later events would show that this might have been a bad decision, but honestly, even with that, I still think that was a decision that I would have supported. Caffe Bene itself have a cafe roasting factory that produces their blend of roasted coffee. Synergies seems aplenty if things had gone well.
2. I don't know anything about this. Would go dig and find out more! Thanks for highlighting.
3. Salim owns 24.66% of the company and yes, they can veto a takeover. However major stakeholders can still make targeted acquisitions of the public float only without triggering a need for Salim Group to vote. That's what happened with Auric Pacific. In that case the father in law and son in law were acting "not in concert".

[specuvestor]

Just saying that I met this company almost 20 years ago and it said it wanted to diversify from their Russia concentration of 3/4 or something sales

[grandslam]

Let me kick this off with some comments on the company itself. Suffice to say, I find it to be at an interesting price point.

Brief Intro of the Company
Food Empire is a global branding and manufacturing company specialising in the food and beverage industry. The Group’s portfolio of products includes instant beverages, frozen convenience food, confectionery and snacks. Some of the most notable brands in their portfolio are that of instant coffees. Back in 2014, with the Russia Ukrainian conflict, international sanctions were levered on Russia. Coupled with a steep drop in oil prices, the Russian Ruble faced a sharp devaluation. In turn this resulted in Food Empire, which has its largest businesses in Russia and Ukraine, rack up losses for financial year 2014.

What's happening in 2019
The company has undergone an intensive diversification strategy since 2014 in a bid to avoid history repeating itself. In 2014, the percentage of sales coming from Russia + Ukraine amounts to 65.5%. In 2013, the same category took up 71.6% of revenue. In 2019 as of 1H19, Russia and Ukraine makes up 49.1% of sales with much higher contribution from other countries. The risk with Russian Ruble and Ukrainian Hyrvnia fluctuations still remains though less so. The company is currently undergoing rationalisation of underperforming segments (which in my interpretation is shutting down or reducing exposure to loss making segments). During the AGM in 2019, it was mentioned that in Myanmar itself, the company lost $4m in 2018. Subsequently, analyst reports were highlighting reductions in A&P costs in Myanmar and Philippines. I see a very similar scenario here to what had happened to Auric Pacific prior to its privatisation whereby it closed off loss making businesses in a rationalisation push (Delifrance etc).

Balance Sheet Strength
Net Asset Value of the Group is at USD$190.5m (SGD262m or 49.3 cents per share). Loans have increased in the past year to fund the building of a second instant coffee plant in India. At first glance, there is nothing to shout about with regards to balance sheet strength, but the fact that the share is trading near to book value for a consumer staple is notable (51.5 cents at the point of writing). The strong cashflow gives comfort in the ability in repaying the loan.

Earnings
Post rationalisation exercise, the trailing twelve months earnings come in at USD21.443m (SGD29.484m or 5.48 cents per share giving 9.4 P/E ratio). Close to home, Super Group was taken private at 32.69x PE Ratio and 16.10x EV/EBITDA with a mean on the comparable companies at 16.69x PER and 10.83x EV/EBITDA. Current EV/EBITDA ratio on Food Empire is at 6.93 x as per WSJ.com. Another interesting comparison, Power Root Bhd which is behind Ah Huat white coffee, is trading at 27.62x PER and 21.55x EV/EBITDA. I am not saying that Food Empire should be valued at those levels, but it goes to show that the current valuations are not demanding.


Catalysts for Profit Growth
The manufacturing facility in India is expected to commence operation in FY2020 (expansion of Indus Coffee manufacturing facility). If you look at the Annual Report, the segment under others is where the India instant coffee manufacturing facility's sales would go. That segment is has the highest profit out of all the segments, and has a high inter segment sales. I interpret the breakdown to mean that the ingredients business (both providing instant coffee powder as B2B raw ingredients business and providing them internally) is highly profitable. Commencement of the expanded facilities, would thus in my opinion provide a boost to earnings.

The Wildcard
Back in 2016, the company acquired a stake in Caffe Bene in a bid to diversify businesses and in the process hopefully create synergies in the coffee industry. The company was already in trouble for expanding too quickly and couldn't turn its fortunes around. It finally got approval for a court led rehabilitation scheme to help the company get out of insolvency. This included debt to equity swaps that resulted in the shareholding of Hallyu Ventures (Which Food Empire holds 51%) to be diluted to 37.6%. In Oct 2018, Caffe Bene graduated early from the rehabilitation scheme. However it is currently still registering losses as of 1H19 even though revenue seems to have stabilised from years of decline. From the whole boom and bust cycle, there used to be 600 stores in China alone, with the China JV now having gone bankrupt. The company seems to be actively managing the business such as reducing the franchising costs, tying up with well known brands to refresh the menus, and rebranding the name in Korea. Most importantly, Food Empire has fully written off the 18.8% ownership in Caffe Bene and holding the investment at zero. This is effectively a free option.

Insider Transactions and Share Buy Backs
The company has commenced share buybacks since 30 Sep. While share buybacks are not an indication of a share being undervalued (Lehman was buying back shares all the way till it went bust), insider transactions definitely indicate management's view that the business is undervalued. Mr Sudeep Nair has been buying shares over the years and increasing his shareholding of the company.

I would say that this is an opportune time to pick up a consumer staple business that's not embroiled in the US China Trade War and in my opinion undervalued at the current traded price.

Hi Squirrel.

I think that is a good summary. It is a company that I have been looking at, on and off, over the years. As you mention, it is trading at a very low multiple for a consumer goods company but that is probably also a reflection on its volatile markets. I failed to pull the trigger when it was trading in the 30s and the Russia business was recovering (a few years ago). As you mention, the CEO then aggressively bought shares and ramped to shares up to the 50s and it continued from there. Concerns that have held me back from investing :

1. The Caffee Bene acquisition that just seemed ill timed and ill advised
2. Their investment in building an office building in Singapore to not only house the company but also to generate income from renting it out. I think theis was three to four years ago. To me, that seemed like diversifying into "property investment" instead of focusing at what they are good at
3. If I remember correctly, Salim owns a major stake so they could veto any privatisation or trade buyer

NOT VESTED

2. Their investment in building an office building in Singapore to not only house the company but also to generate income from renting it out. I think theis was three to four years ago. To me, that seemed like diversifying into "property investment" instead of focusing at what they are good at

Not sure if this is the one someone asked or the chairman mentioned in agm I attended two years ago. If I recalled correctly, the chairman said it is the freehold which is rare in that area (somewhere near Tai Seng), and the property is pledged for loan to finance the biz expansion.

IMO, I think the company is still focusing their core biz, which is evident from the Indian expansion and the successful establishment of the its presence in Vietnam. 

Vested. 

[mslee888]

I feel the main weakness for this company is forex risk due to its exposure in Russia, UKraine, etc and reporting the results in USD.
A 10% swing in rouble movement will probably affect their profitability substantially. Otherwise, it is doing relatively well in terms of business expansion in IndoCHina and its ingredient segment.

[Squirrel]

I feel the main weakness for this company is forex risk due to its exposure in Russia, UKraine, etc and reporting the results in USD.
A 10% swing in rouble movement will probably affect their profitability substantially. Otherwise, it is doing relatively well in terms of business expansion in IndoCHina and its ingredient segment.

That is a very good point. I went to dig into the Annual Reports to look at the risk from FX swings.

In the 2013 AR, its stated under analysis for foreign currency risk

UAHUSD (weaken 5%)         $(1,064,000)
RURUSD (weaken 5%)         $(1,167,000)

In 2014, Russian Ruble depreciated from 32.87 to 58.25 as of end of 2014 with a peak of 68.15 in between. Ukrainian Hyrvnia depreciated from 8.24 to 15.82. In that year alone, the company suffered $(29.2)m in losses. 77% weakening in RUR and 92% weakening in UAH should result directly in about $(37)m of losses due to FX fluctuations. Do note that there were high degrees of devaluation in MYR as well during this period of time which would result in substantial losses that are not included in this calculation. Therefore it seems like the metrics provided are more conservative in nature and actual losses are less from this data point.

In the 2018 AR

UAHUSD (weaken 5%)         -$225,000
RURUSD (weaken 5%)         -$348,000
EURUSD (weaken 5%)         -$471,000


The FX risk related to the currencies seems to be much reduced after the company has learnt its prior lessons, deploying natural hedges as part of their means in reducing exposure to FX fluctuations.

Given the above, even if UAH and RUR were to experience sudden 50% depreciation, the hit to the profit and losses would be around the $(5)m region,  which is highly manageable if they continue performing as per last 2 quarters. And do take note, FX can go both ways.

[Squirrel]

Just saying that I met this company almost 20 years ago and it said it wanted to diversify from their Russia concentration of 3/4 or something sales

Hi, its very interesting that you met up with the company. Was it at an AGM or under other circumstances? How did you find the management?

I can't say whether they have succeeded in diversifying with the current concentration in Russia and Ukraine, but from their actions they definitely did try and their actions did show some results.

[specuvestor]

Think we wrote in to HR for a visit back then. 2 years later they sponsored S-league which mgt say was marketing expense

Reading between the lines, just saying they haven't progressed in diversifying past 20 years

[Squirrel]

Anybody with perceived risks or comments on this company? Seeing the lack of responses on this company is exciting. Its a real possibility the company is being overlooked!

[donmihaihai]

Anybody with perceived risks or comments on this company? Seeing the lack of responses on this company is exciting. Its a real possibility the company is being overlooked!

Co. Not interested by this forum is a good start.

FE is a showcase of ‘brand doesn’t travel well’. You need a lot of extra( start with $$) to enter new market( country). Investing in FE is about investing in the future of these countries. Never change since listed.

Currency risk. If RUR down by 50%. Earning will down by 50% if revenues and cost are both in RUR. Earning become smaller and it headquarter cost are in sgd. all these won’t appear in forex gain/loss because of accounting. What shown in the ar is for the net forex risk sitting on b/s only.