CGS International analyst William Tng has kept his “add” call on Food Empire Holdings F03 after he visited the company for an update on March 26. The analyst has also maintained his target price at $1.84, which is valued at 11.2 times Food Empire’s P/E for the calendar year (CY) 2025. The target price also represents 1.0 standard deviation (s.d.) above its five-year mean from FY2019 to FY2023.
In his report dated March 27, Tng sees that there is potential for Food Empire to improve its valuation to 14.4 times P/E and 2.0 s.d. above its five-year mean through two key ways. This can be done through the building of a new three-in-one coffee mix plant in Kazakhstan, where the company can grow its brand strength and products in the Commonwealth of Independent States (CIS) and Kazakhstan. The group is already seeing strong demand for its products in the region, notes Tng.
Next, Tng recommends that the company looks to growing its food ingredients business. As it is, Food Empire has already completed its expansion for its non-dairy creamer product in Malaysia. The analyst expects volume production to commence by 2QFY2024 ending June.
In India, Food Empire’s spray dry and freeze dry coffee plants are at full capacity and the company has indicated that it expects demand to remain strong.
“We think Food Empire can grow its food ingredients business into a bigger net profit contributor over the next five years via expansion with new plants for non-dairy creamer, coffee powder and potato snacks),” says Tng.
“[It can also] explore valuation uplift via dual listing in other exchanges where there is stronger interest in branded food and beverage companies,” he adds.
In October 2023, Food Empire announced that it is looking to conduct a dual primary listing of its shares on the Main Board of the Stock Exchange of Hong Kong (SEHK). The company has been listed on the Mainboard of the Singapore Exchange S68 (SGX) since April 2000.
Over the past 10 years or so, Hong Kong’s non-alcoholic beverage sector has fetched a premium of 105% to the Hang Seng Index (HSI) versus the 72% premium as at November 2023 when The Edge Singapore last spoke to Food Empire’s executive chairman, Tan Wang Cheow.
At the time, the same sector was trading at a 12-month forward P/E of 13.8 times versus the 10-year average of 22 times. In contrast, Food Empire trades at a forward P/E of just over 8 times and is at a discount to its global peers. The international beverage sector trades at a P/E range of 17.3 times to 30 times with a 10-year average of 23.7 times, while the international coffee segment trades at a P/E range of 18.1 times to 25.9 times with a 10-year average of 22 times.
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Higher dividend expectations
While Tng has kept his earnings estimates unchanged, he has raised his dividend per share (DPS) estimates for FY2024 to FY2026 by 53.2% to 74.8% after assuming a payout ratio of 45.0%. The new estimates assume more “attractive” dividend yields of 5.05% to 5.75% over the FY2024 to FY2026.
Tng’s new assumptions is higher than his previous base case of 5.0 cents a year, representing a “conservative” payout ratio estimate of 25.7% to 29.4% over the same period.
In FY2023, Food Empire declared a total dividend of 10 cents per share comprising a final and special dividend of 5 cents each.
“In terms of dividend scenarios, we think Food Empire can consider declaring interim dividends so that shareholders can enjoy a share of the company’s excess cash twice instead of having to wait till the full-year results (FEH currently only declares full-year dividends),” says Tng.
“Food Empire can continue to remain attractive as a dividend-yield stock,” he adds.
Other factors behind Tng’s call include the company’s potential to grow its operations in Vietnam into a new major revenue contributor. Its potential to grow its food ingredients business, as well as the end of its major capital expenditure (capex) cycle in FY2023, allowing Food Empire to improve its dividend payout, are other reasons.
Shares in Food Empire closed 2 cents higher or 1.49% up at $1.36 on March 28.
