CGS-CIMB Research analysts William Tng and Ong Khang Chuen have initiated an “add” call on Food Empire Holdings F03 with a target price of $1.69.
Food Empire is a food and beverage (F&B) company that manufactures and sells a three-in-one instant coffee mix, as well as ingredients such as coffee, non-dairy creamer and potato snacks. The company believes that its market share in the instant coffee mix in Russia stands at 50% of its revenue. Food Empire is also believed to be the third largest instant coffee mix brand by sales in Vietnam as at 2022.
“Our ‘add’ rating is premised on [Food Empire’s] potential to grow Vietnam as a new major revenue contributor, [its] potential to grow its food ingredients business, [as well as] the end of [the] capital expenditure (capex) cycle, allowing Food Empire to return excess cash to shareholders,” say Tng and Ong in their report dated Oct 3.
They add that there are opportunities for the company to diversify its operations into Vietnam and into the food ingredients business. This is after having successfully navigated Russia, Ukraine, and the Commonwealth of Independent States (CIS), where Food Empire has a significant presence in.
“Food Empire has seen success in growing its business in Vietnam, in our view. As at end-FY2021, Vietnam accounted for 19.5% of its total revenue. By revenue, Food Empire's MacCoffee was the number three brand in Vietnam, with a 13.6% market share (in terms of revenue) in 2022. Management plans to lift its market share with new products,” say Tng and Ong.
“The food ingredients business is another segment that Food Empire is focused on growing, with capacity expansion being added to its non-dairy creamer manufacturing operations (scheduled to commence production by end-4QFY2023),” they add, referring to Food Empire’s annual report for the FY2022.
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Food Empire’s policy of sharing excess cash to its minority shareholders is also something the analysts look upon favourably.
“Management has applied excess cash to dividends, share buybacks, and mergers and acquisitions (M&A), if suitable opportunities emerge. [Food Empire’s] dividend per share (DPS) has increased from 2.00 cents in FY2019 to a record 4.40 cents in FY2022. Food Empire has been buying back its shares since 2012. As of Sept 5, [the company] had 20.4 million treasury shares from its share buybacks executed over the years,” they point out.
In their view, key re-rating catalysts include improving operating margins on stabilising market demand and maintaining its market share in its key market, Russia. Key downside risks are an escalation in the Russia-Ukraine war, unfavourable foreign exchange (forex) rate movements, and rising commodity prices.
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Tng and Ong’s target price is based on a P/E of 11.2x Food Empire’s estimated FY2025 earnings and 1.0 standard deviation (s.d.) above its five-year (FY2019 to FY2023) average P/E of 8.2x. This is given the analysts’ expected FY2022 to FY2025 earnings per share (EPS) compound annual growth rate (CAGR) of 7.03%, 3.93% dividend yields in FY2023 to FY2025 and its established brands.
As at 10.07am, shares in Food Empire are trading 2 cents higher or 1.82% up at $1.12.
