Food Empire

[ichiran]

Has anyone researched into Food Empire?

Came across this article in The Edge and NextInsight which featured Lumiere Fund investing into Food Empire. What I like about FE is their strong branding in Russia and CIS states. They were also talking about growing into the Middle East and Indian markets.

http://www.nextinsight.net/index.php/sto...betting-on

Had a quick look at their financial statements and here are some of my areas of concern -

1. Though Food Empire’s turnover and profit growth had increased consistently from FY2000 to FY2008, with 9 year average ROE of 21.4%, I noticed that their cash generated from operations had been lagging behind net profits, save for 2003.

2. Free cash flow was negative in 2006 - attributed to acquisitions such as Petrovskaya Sloboda brand (which is not necessarily bad), and also operations (no good). FY 2008 to 2009 saw a huge jump in net cash generated from operating activities (USD 1.57m to 59.39m), even though profits shrank (USD 23.2m to 3.18m), mainly due to USD2.4m impairment of intangibles (??) and a significant decrease in receivables and inventories. Is this a one-off or improvement in cash flow management?

3. Another area of concern was the growth in account receivables outpacing the growth of revenue since FY 2001 to 2008. It remains to be seen whether the turnaround in FY09 can be sustained.

4. Is the company able to pass escalating costs of raw materials onto consumers? Already we are seeing the impact on bottomlines of such companies such as Etika...

Welcome discussion pls.

[Blackjack]

I read the article. Basically Lumiere's gains were amplified simply because their investors (consisting of family and friends) stuck with them throughout the downturn. If they had faced the same redemptions as other funds it would have been a different story. Even so, if you take into account their losses in 2008, their net returns taking in the "sterling" gains in 2009 and 2010 would only be meagre.

Their entry into FE was done at approximately 34 cents. If you recall FE was hovering at that level for a long time. This means that most of FE's price increase from then till now was probably attributed to Lumiere.

[Jacmar]

Has anyone researched into Food Empire?

4. Is the company able to pass escalating costs of raw materials onto consumers? Already we are seeing the impact on bottomlines of such companies such as Etika...

I used to own this counter sometime back but has since disposed it off. didn't make much from it as the financial crisis took most of my paper profits. their mkt are in countires that has significant soverign risk ie russia, vietnam, ukrain and now the middle eastern countries.when i 1st own it, it was a toss between fe and supercoffee. chose the wrong horse then as super has continue to grow pass them.so a better comparison is super and not etika. coffee and other commodity prices is shooting upwards. all these companies will be tested on their ability to pass through the cost increase...watch their gross/net margins closely.

[mikh]

Their branding and name in Russia and CIS are indeed quite impressive and they've invested to get there. It takes quite a bit to establish the distribution channels and maintain its position in this kind of market. Note that there is significant shareholding by the Salim Group, last I heard.

Concur with Jacmar. Country risk is significant. Nestle is a competitor in its markets. Might want to look at their product lines carefully as well.

[Blackjack]

I don't think Nestle has a presence in Russia that threatens their market share. In fact it might make more sense for Nestle to acquire FE if they wanted to have a quick and effective entry.

[mikh]

Not sure about that, and i cant claim expertise in this area but those interested in the counter might want to read this overview which covered the Russian coffee mix market somewhat.

http://www.foodmarket.spb.ru/eng/archive...&section=5

[dydx]

I cannot imagine Nestle would not want its global "Nescafe" brand to be the leader in Russia and other ex-CIS markets. Besides, Nestle can quite easily support these markets from its already well-established operations in EU or Eastern Europe. And we must not forget as a giant MNC, Nestle has all the resources to eventually succeed in these markets. So I think it is fair to assume that Food Empire's brands will have a hard time in these markets. My guess is that it is quite certain Food Empire's brands will lose out to Nescafe and other local brands in these markets eventually.

In FY09, following the last global financial crisis, Food Empire had to suffer a huge drop in business volume and revenue, as well as a net loss in H1.....
http://info.sgx.com/webcoranncatth.nsf/V...60032D151/$file/4Q09FEHResults.pdf?openelement
It is quite scary that during the crisis, Food Empire couldn't - or didn't want to - protect the business which the company had spent so much effort, time and resources to build. Or was it also beacuse their local distributors were not strong enough financially?

[ichiran]

I think it was hit by a double whammy during the crisis -
1. Weak consumer demand/sentiment; and
2. Currencies of FE's 3 largest markets (Russia, Ukraine and Kazakhstan) depreciated sharply.

When we compare the financial performance/statements of FE, Super and Viz Branz, it's quite clear that Viz Branz and Super are superior to FE.

In terms of branding, it's difficult to compare between the 3 as it's intangible. I can only vouch for Super's strong branding and market presence in Singapore, whereas not so easy to verify for the other 2 brands, as they are in overseas markets.

Given the above, I'm still scratching my head wondering why Lumiere chose FE over Viz Branz and Super.

[Blackjack]

FE's 3 primary markets (Russia, Ukraine, Kazakhstan) have a combined coffee consumption per capita that is way lower than any of the top 20 countries alone. In terms of population however, Russia alone probably accounts for one of the top 10 nations. With the continental cold weather in Russia, coffee consumption can be said to be a natural activity and pastime. If you consider the macro picture holistically, that's some pretty good room for growth.

I think it is an inherent difficulty to break into the Russian market. FE was a pioneer in this product line in Russia, and by the time Nestle got started, FE's market presence was already quite well entrenched. In fact they were so successful that many Russians do not know FE is a Singapore company. You can read all about this including the difficulties here. http://www.forbes.com/global/2008/0929/036.html

Of course Nestle would want to wrestle control from FE, and I don't doubt they have the financial muscle to do so. FE on the other hand is also constantly trying to consolidate its foothold at the same time, for instance through its acquisition of Petrovskaya Sloboda in 2007, a home grown brand. Nobody knows what the future holds. It is also common knowledge that Russian government is somewhat linked to the mafia, especially within the oil industry. These are of course big concerns which no one can comfortably negate. Having a good macro is worth nothing if there is no predictability.

Having said that, I am vested. I am hesitant to build my stake though, as there seems to be something substantial missing here. Something that I just can't put my finger on.

Btw, why is this thread not in the usual 'E to F' thread?

[Musicwhiz]

Thread has been moved.

Regards.