Lim & Tan Securities released this report on 27 May 2020

We initiate coverage on FOOD EMPIRE Holdings at a share price of S$0.515 with an ACCUMULATE recommendation and a P/E-based TP of $0.63, representing a potential upside of 22.3%.

Food Empire

Share price: 
51.5 c

Target: 
63 c

Despite the attractive valuations and favorable macros surrounding Food Empire Holdings, the heavy uncertainty and economic impact surrounding COVID-19 is still unable to be quantified.

We believe that a second wave of infections may also 
be likely considering that a vaccine will need some time to be released.

This has led us to decide upon an ACCUMULATE recommendation rather than an outright BUY.

However, post COVID-19, a recovery of business 
conditions and confidence may plausibly warrant a future re-rating of the counter.

Amongst its SEA peers, Vietnam has had the largest percentage change in soluble coffee consumption per capita between 2003 and 2017 at 344%, compared to the average of 156%.

Premium pricing

cafepho8.15

Despite entering the market with premium pricing, Food Empire’s Café Pho has been consistently gaining market share from incumbents such as Nescafe and Vinacafe. It has grown considerably from c.4.4% in FY15 to c.11.4% in FY19. After gradually paring losses within the first 2 years of operations in Vietnam, their profits surged at a CAGR of 19.5% from FY15 to FY19. "


-- Lim & Tan Securities

While we expect resilience from the instant coffee market during the global pandemic, management has indicated that footfall and general consumer purchases will invariably fall during this difficult time as unemployment rises.

Post COVID-19, we expect Vietnam to continue being one of Food 
Empire’s key revenue drivers as FEH grows its market presence within the country and takes greater market share from its competitors.

The bulk of FEH’s earnings is derived from Russia, where FEH remains a market leader with approximately 50% market share within Russia and the CIS countries.

Before the Ruble’s depreciation in 2014-2015, 
c.60% of FEH’s sales were derived from Russia. In recent years, Russia has only contributed to c.40% of its revenue, but still remains FEH’s biggest market.

Looking ahead, we expect Russia to remain as one of 
FEH’s largest revenue contributors at c.40% of sales. Of note, in Russian Ruble terms, FEH experienced signifi cant 25% and 10% growth rates in 2015 and 2016 respectively.

Barring the fluctuations of the RUR/USD, we 
would have seen FEH’s Russia segment grow steadily at an average of 6% per annum instead of -3% in USD terms between 2015-2019.

CEO, Executive Chairman

Sudeep Tan

As of mid-March 2020, Group CEO Sudeep Nair holds a stake of 11.2% in Food Empire. Along with founder and executive chairman Tan Wang Cheow and his wife, the trio collectively own more than 30% of the company.

(NextInsight file photo)

As Sudeep has been instrumental in successfully penetrating Vietnam and accelerating the company’s growth, he has shown a strong track record in delivering growth since taking over as the CEO of the company in 2012.

He has also been increasing 
his stake via purchases of shares in the open market from 2016 to 2019.

We like that this keeps the interest of management aligned with that of shareholders as this ensures their commitment towards Food Empire’s continued growth.

With the unexpected onset of COVID-19, there is a need for companies to better conserve cash and divert resources to ensure business continuity in the midst of demand and supply chain constraints.

While 
shareholders were rewarded with a dividend of 2 S cents per share for FY19 (representing a dividend yield of 3.9%), we believe dividend cuts will be necessary for the short term.

We peg dividend payout ratios at a conservative 15% of earnings in the short term as we expect Food 
Empire to conserve cash, while remaining positive on the increment of dividend payouts upon the return of business confidence in the global economy.

For FY20F, we project a dividend payout of 0.63 S cents per 
share, representing a dividend yield of 1.2%.

At S$0.515, market cap stands at S$276.4mln.

FEH’s P/E stands at 7.4x 
with a P/B of 0.9x, which we believe shows its undervaluation compared to the local peer average of 16.2x and 1.3x.

Looking ahead, we ascribe 
a FY20F P/E of 12.3x and P/B of 0.9x.

They are currently in a net cash 
position, with net cash to market cap at 1.7%.

Initiate coverage with an 
ACCUMULATE recommendation and a P/E-based TP of S$0.63.

 


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