RHB Bank Singapore analyst Alfie Yeo has lowered his target price on Food Empire to $1.52 from $1.75 to factor in the company’s proposed notes issue to Ikhlas Capital. Yeo has also lowered his earnings estimates by 4% to 9% for the FY2024 to FY2026.
On June 24, Food Empire announced that it entered into a strategic partnership with Ikhlas Capital where Ikhlas Capital will invest an initial capital of US$40 million ($54.1 million) into a special purpose vehicle (SPV) wholly owned by Food Empire. The SPV will have the option to hold a portfolio of business operations including Food Empire’s Southeast Asian and South Asian businesses. The amount will be invested via a five-year redeemable exchange note with 5.5% annual interest.
Ikhlas will have the non-obligatory right to convert the notes into new shares at $1.09 apiece.
Ikhlas Capital is an Asean private equity (PE) fund manager that is licensed by the Monetary Authority of Singapore (MAS). Its founding partners are former CIMB chairman Nazir Razak, Kenny Kim, Gita Wirjawan and Cesar Purisima. Kim is the former group CFO of CIMB while Wirjawan is Indonesia’s former minister of trade. Purisma is a former secretary of finance of the Philippines.
The proceeds will go to capital expenditures and mergers and acquisitions in Southeast Asia and South Asia. The way Yeo sees it, the proposed funding may be related to the planned development of a new instant coffee plant in Vietnam. Food Empire, on June 19, clarified that it was conducting feasibility studies and exploratory discussions with Vietnam authorities to construct the new factory.
That said, Yeo sees the notes as a “slight negative” for Food Empire’s earnings as they will incur US$2.2 million of annual interest costs, or a 3% decline in the company’s net profit for the FY2025 to FY2026. The notes will also affect Food Empire’s FY2024 earnings negatively by 1.5% assuming a half-year impact.
In addition, the analyst has also lowered his margin estimates to account for the high coffee prices.
However, Yeo remains upbeat on Food Empire’s prospects, as he maintains his “buy” call.
“We continue to like Food Empire for its strong balance sheet, cash generation ability, market share traction, valuation, and share buyback initiative,” he writes in his July 3 report.
See also: RHB still upbeat on ST Engineering but trims target price by 2.3%
The company also has the capacity to drive growth with its new non-dairy creamer plant in Malaysia to reach full utilisation in a few years. The company’s new snack production capacity is also expected to contribute to its earnings from FY2025 onwards while its first coffee mix production facility in Kazakhstan is also expected to be completed by the end of 2025.
Shares in Food Empire closed 2 cents higher or 2.06% up at 99 cents on July 4.
