This week's potential superstock is Food Empire Holdings Limited (SGX: F03). Food Empire is a global branding and manufactu...

Weekly Superstock Scan 15 May - 19 May 2017: Food Empire Holdings Limited (Singapore)

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This week's potential superstock is Food Empire Holdings Limited (SGX: F03).








Food Empire is a global branding and manufacturing company in the food and beverage sector. Its products include instant beverage products, frozen convenience food, confectionery and snack food. Food Empire’s strength lies in its proprietary brands – including MacCoffee, Petrovskaya Sloboda, Klassno, Hyson, OrienBites and Kracks. MacCoffee – the Group’s flagship brand – has been consistently ranked as the leading 3-in-1 instant coffee brand in the Group’s core market of Russia, Ukraine and Kazakhstan. 

I saw for myself how dominant the brand was in Kazakhstan while I was there on a six month exchange programme. It was practically the only brand of instant coffee/tea/chocolate that I could find in the supermarket and eateries when I wanted my caffeine fix. Writing this post makes me miss MacChocolate and ironically I cannot get it in Singapore even though Food Empire is a Singapore company.

Food Empire organise itself into 5 reportable segments based on geographical locations. They are:
  1. Russia
  2. Ukraine
  3. Kazakhstan and CIS markets (Uzbekistan, Turkmenistan, Azerbaijan and etc)
  4. Indochina
  5. Others
Russia is Food Empire's largest market, contributing approximately half of the group's revenue.


Technical


Food Empire has been trading between $0.54 and $0.64 since February 2017. Last week, upon release of 1Q2017 results, the stock price surged from $0.58 to $0.67 in a single day. The volume on the day of the surge was close to 8 times its average trading volume.

Looking at the longer term charts, the stock price Food Empire was on a downtrend since 2014, mostly due to the Russian currency crisis. Only in 2016, the stock price started to reverse and the momentum continued into 2017. Just half a year ago in November, Food Empire was trading in the $0.30 range, less than half of today's price!

Fundamentals


Including the current quarter, Food Empire reported 3 consecutive quarters of year on year EPS growth. 

Upstream Vertical Integration

In 2015, Food empire commenced operation in its non-dairy creamer plant, snack factory and the beverage manufacturing facility in Malaysia and its instant coffee plant in India. The expansion has provided Food Empire with greater control over the supply and production of raw materials.

These plants have been contributing to Food Empire's top and bottom line since commencing operations. Food Empire have plans to ramp up operations in these plants to further increase profitability.

Geographical Expansion in Indochina and China

Indochina has been Food Empire's fastest growing market in the past few years. The revenue from Indochina increased 8 times from US$5 million in 2013 to US$40 million in 2016, while the revenue from Russia, Ukraine and Kazakhstan fell over these years. 


The growth in Vietnam has particularly strong, and RHB estimated that Vietnam contributed US$35 million of revenue in 2016. Food Empire’s cafĂ© PHO, which was only introduced in 2014, is now the top 5 coffee player in Vietnam.

In 2017, Food Empire has set sight in penetrating deeper into Myanmar, China and other Southeast Asia countries. This will provide diversification for the group and find growth given the instability and saturation in the CIS countries.

Turnaround for Caffe Bene

In March 2016, Food Empire made an investment in Caffe Bene Co., Ltd., one of South Korea’s largest coffee house chain with a global presence of about 800 stores worldwide. However, the investment has been dragging down Food Empire and an overhaul has been carried out to turn around the business.

Food Empire has guided tat Caffe Bene would turnaround in 2017 and introduced its plan to list Caffe Bene in two years.

Insider Buying

Food Empire's CEO, Mr Sudeep Nair's made 2 acquisitions of Food Empire stock in March 2017. He bought a total of 4 million Food Empire shares at an average price of $0.578.

Matrices
o Reasonable P/E - With a trailing twelve month EPS of $0.058, at the current price of $0.67, it is trading at a P/E of 11.6 times, which is fairly reasonable. The valuation should come down in the coming quarter as the Russin Ruble has recovered significantly in 2017.
- Large Float - Food Empire has a large float of  172 million shares. With a average volume of 1 million shares shares, the float is about 170 times its daily trading volume.


Risk Factors/ Things I do not like


  • Currency risk: The Rubles and the CIS currencies lack stability and fluctuates greatly with oil prices and geopolitical tensions. Food Empires' profitability is highly susceptible to a downward movement of these currencies.

  • Hard to penetrate Asia market: Food Empire may have done well in Vietnam, but every market in China and South East Asia is different. Nestle has been very dominant in South East Asia and there is no guarantee that Food Empire can replicate its success in Vietnam.


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All information in The Trader Diaries (TTD) does not constitute to investment advice or recommendation to buy, sell or hold. Readers are advised to consult their financial advisors prior to making any investment or pursuing any investment strategy. TTD will not be liable for any losses resulted from information published or shared from the blog.