RHB Singapore continues to like Food Empire, as the research house maintains its “buy” call but with a new target price of $1.23, lower than $1.36 previously.
“We continue to like Food Empire for its strong balance sheet, cash generation ability, market share traction, valuation, and growth led by capacity expansion,” says analyst Alfie Yeo, who has cut FY2025 and FY2026 earnings on higher depreciation due to the construction of new plants.
The lower target price is based on 9x FY2025 P/E. This lower multiple accounts for revenue and margin headwinds including price challenges in Russia and elevated coffee prices.
The group is starting a new coffee manufacturing facility investment in Vietnam. It will be investing about US$80 million ($103.7 million) including working capital in a new freeze-dried soluble coffee manufacturing facility in Binh Dinh province, Central Vietnam.
This will be the group’s second factory and first ingredients production facility in Vietnam.
“It can tap on Vietnam as a leading producer of Robusta coffee beans for supply, to produce freeze-dried soluble coffee. The new facility will help to increase the production of freeze-dried soluble coffee, in addition to its existing manufacturing facility in India,” says Yeo.
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This will help FEH to diversify and grow its ingredients business to become a key player in spray-dried and freeze-dried soluble coffee.
The facility is expected to be completed in early 2028. The group raised US$40 million of redeemable exchangeable notes from Ikhlas Capital, and Yeo believes that this will come in handy to help fund this Vietnam expansion.
This new facility is a long-term investment where production will commence only in 2028, but there is no revenue benefit before that, except for increased capex and depreciation, notes Yeo, who has imputed higher capex for FY2025 and FY2026, as well as increase depreciation expense assumptions marginally due to the construction of the new plants.
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While Yeo is positive on Food Empire’s long-term growth, supported by higher production in Malaysia, Kazakhstan, and Vietnam, he remains cautious on elevated coffee prices, the interest expense on notes issued to Ikhlas Capital and its conversion price of $1.09, as well as the short-term challenges of raising product prices in Russia.
Other risks include a disruption in operations due to the Russia-Ukraine conflict, and the negative effect of a change in the value of the Russian and other CIS countries’ currencies.
Shares in Food Empire closed at 98 cents on Sept 16.
