Food Empire (FEH) is a global F&B company that manufactures and markets instant beverages, frozen convenience food, confectionery and snack food. The company’s products can be found in over 50 countries across Asia, Africa, Middle East, North America and Europe.
Excerpts from RHB report (TOP SINGAPORE SMALL CAP COMPANIES -- 20 JEWELS 2023 EDITION)
Analyst: Alfie Yeo
Growth continues to be driven by the core Russia, Ukraine, Kazakhstan and Commonwealth of Independent States (CIS) markets, and supplemented by the South-East Asia segment
Operations in Russia and Ukraine continue to be stable as heavy fighting is in the east of Ukraine – away from its factory, which is in the central region.
Valued at 7x FY23F P/E, ie below the historical mean, or 6x P/E on an ex-cash basis. Offers c.5% dividend yield
|Russia, Ukraine, Kazakhstan and CIS markets|
Russia, Ukraine, Kazakhstan and CIS markets continue to drive growth, supported by South-East Asia. Meanwhile, its sales in Ukraine remain stable despite the Russia-Ukraine conflict, as FEH is in the business of supplying essential items, ie food and drinks.
Its market share has been growing, especially in Russia, and we expect sales growth to continue beyond FY23, as it leverages on the popularity and higher demand for its products there.
Elsewhere, FEH has been building its non-dairy creamer production facility in Malaysia, and we expect this to support overall growth.
|Still operating in Russia and Ukraine.|
FEH, a producer of essential food items, has not seen any major sales disruptions in Russia and Ukraine. Retail channels and supply chains continue to run.
Due to its marketing efforts, its sales in Russia and Ukraine surged by close to 30% YoY each in FY22.
Also, its sales volumes remain stable in Russia and Ukraine, even though selling prices have increased.
FEH’s factory in Ukraine is located in the central region – away from the heavy fighting that is concentrated in the east of the country.
Barring battle lines progressing into the central Ukraine, which is a key risk to our earnings forecast, we see a stable outlook for earnings in these key markets.
As a brand owner, FEH was able to sustain its profitability better than distributors and retailers, especially in Russia and Ukraine.
|Share buyback supports EPS.|
FEH’s share buyback activity has accelerated in the past two years.
The number of treasury shares increased from 1m shares in 2018 to 8.6m in FY21 and 14.3m in FY22.
The strong cash flow generated from operations has provided it with ample cash resources to conduct such share buyback activities, which improves EPS and boosts shareholder value.
Company Report Card
|Strong FY22 earnings beat our estimate.|
“FEH’s share buyback activity has accelerated in the past two years.
Revenue and core earnings grew 25% YoY and 143% YoY to USD415m and USD52m.
Revenue growth was largely driven by Russia (+29% YoY, USD148m) and Ukraine, as well as Kazakhstan and the CIS countries (+29% YoY, USD92m).
This was offset by the slight post-COVID-19 normalisation in the South-East Asia segment (-4.2% YoY, USD93m).
Gross margin expanded 0.5ppt to 29.8% on some price adjustments, while EBIT margin reached 14.3% (+5.7ppts) on better leverage and economies of scale in Russia after reaching its highest market share in FY21.
A first and final DPS of 4.4 SG cents was declared, with a dividend payout ratio amounting to c.35% of core earnings.
|Balance sheet/cash flow.|
FEH is a brand owner and manufacturer of branded F&B products and, as such, its business is cash flow generative.
In FY22, FEH generated operating cash flow of USD71m, equivalent to c.SGD0.18 per share. It has net cash of USD87m, or c.SGD0.22 per share.
The company’s cash balance has increased steadily from USD28m in 2015 to USD126m currently.
Uses of cash include share buybacks, building up manufacturing capabilities and paying out dividends to shareholders
FEH tends to pay around 30% of earnings as dividends. While it does not practice paying interim dividends, there are special dividends given from time to time.
In 2019 and 2021, shareholders were rewarded in special dividends for its strong earnings, and for their standing by the company through a difficult COVID-19 period.
Our DPS assumption, going forward, is tied to 38% payout ratio, as we believe FEH is capable of paying out more – since we expect its cash balance on its balance sheet to swell.
|Led by founder, managed professionally.|
FEH was founded by Tan Wang Cheow, who is its Executive Chairman.
He is supported by CEO and Executive Director Sundeep Nair, who has built and managed the group’s business since 1993.
Sundeep was responsible for the launch and establishment of the group’s brands and businesses in Eastern Europe and CIS countries from 1994 to 2005, prior to his appointment as CEO in 2012.
As of FY22, both Tan’s and Sundeep’s interests are aligned with shareholders, as they are hold substantial stakes of 22.5% and 11.2%.