Tan Wang Cheow, executive chairman of Food Empire, explains how the coffee maker has navigated through multiple crises and outlines strategies for the upcoming growth phase
When the conflict between Russia and Ukraine broke out last February, shares of instant coffee maker Food Empire plummeted from 67 cents to 48 cents within a month, reflecting a typical knee-jerk reaction to adverse news. The prevailing logic suggested that Food Empire — heavily reliant on revenue from both countries — would inevitably face significant setbacks.
Surprisingly, Food Empire has defied these concerns. In its 1HFY2022 results announcement, the first after fighting broke out, the company revealed that sales of its coffee not only remained stable but increased. For the first half of the financial year 2022, ending in June, sales in Russia saw a 4.8% y-o-y increase, while revenue from Ukraine and other former Soviet states surged by 17.2% y-o-y. Sales have further grown since then.
Following the drop in February 2022, Food Empire’s share price has steadily increased, gaining some 135% to close at a near-record high of $1.14 on Nov 15, valuing the company at $605.3 million.
With factories on both sides of the Russian and Ukrainian border, executive chairman Tan Wang Cheow hopes for an end to the conflict but acknowledges the geopolitical nature of the situation is beyond his control. To navigate uncertainty, he prioritises keeping the company agile and adaptable to market dynamics.
As a listed company for over 20 years, Food Empire has weathered various crises and market cycles. “There is always a ‘mini Black Swan’ popping up,” says Tan in an interview with The Edge Singapore. For example, during the Global Financial Crisis, Food Empire scaled back its orders when faced with reduced demand. One supplier, eager to continue selling, had no choice but to stop production at his own factory due to the lowered volume required. “I probably lost about 5kg from the stress,” Tan adds.
See also: Analysts see record year for Food Empire, expect higher dividend
To address the issue in the long term, he opted to control raw materials by moving upstream. Food Empire diversified its revenue beyond coffee by becoming a contract manufacturer of potato chips for leading global brands in this segment.
Eye on Hong Kong, China
In its recent 9MFY2023 ended September business update on Nov 8, Russia was Food Empire’s single largest market, with other former Soviet states and southeast Asia contributing slightly lower revenue share. South Asia is another significant market.
See also: Interra Resources granted 12-month extension to meet SGX watch-list exit requirements
Tan believes significant growth potential exists in other emerging markets and has initiated steps to capture new business opportunities elsewhere. On Oct 16, Food Empire announced its intention to pursue a dual primary listing on the Stock Exchange of Hong Kong (HKSE). Through this move, the company aims to attract new investors, cultivate a more diverse shareholder base, and mobilise additional resources for potential expansion.
He stresses that Food Empire is keeping its Singapore Exchange S68 (SGX) listing and not decamping for Hong Kong for the purported higher valuation and better liquidity. “We are not going anywhere. We want more options with our dual listing in a different market.”
Tan also highlights that the consumer sector ranks among the top-performing sectors in Hong Kong, and Food Empire aims to capitalise on this opportunity for future growth and investor interest. He further notes that numerous Hong Kong consumer stocks are familiar to regional investors.
Food Empire’s planned listing in Hong Kong could leave some upside for new investors. Over the past decade, the non-alcoholic beverage sector in Hong Kong has fetched a premium of 105% to the Hang Seng Index (HSI) versus the 72% premium today. Specifically, Hong Kong’s non-alcoholic beverage sector trades 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.
Tan acknowledges that the market is not currently at its peak, but he encourages investors to view the potential Hong Kong listing as a growth opportunity over the short to medium term, anticipating market recovery.
For Food Empire, the possible Hong Kong listing is its gateway into the greater China market — reaching investors and consumers. Its presence in Hong Kong and China is barely significant now. “There is a 1.4 billion population in China alone, and it is not something we want to miss out on,” he adds.
To stay ahead of Singapore and the region’s corporate and economic trends, click here for Latest Section
While there are no definite plans to share, Tan is not ruling out the possibility of forming joint ventures to penetrate this new market. He understands that entering this new market will entail substantial costs, but he sees it as a necessary and worthwhile commitment. “Sitting here and waiting for things to happen will not do us justice. I think we should do something rather than do nothing. There will be some costs, but we believe greater benefits will come out, much greater than the cost. We can be in better shape than we were before.”
Brave new worlds
Navigating new markets is a well-trodden path for Tan. When he gave his first interview to The Edge Singapore in June 2002, he recounted how he sold PCs in Russia in the 1990s, even though he was not fluent in the language. Having a good business acumen — and perseverance — matters more, evidently.
The initial venture into Vietnam — renowned for its rich coffee culture — in 2004 faced challenges. The deeply ingrained preference for traditional Vietnamese drip coffee made it difficult for consumers to accept a foreign brand selling instant coffee.
In 2005, the company established a factory in Binh Duong province. The turning point came in 2013 with the introduction of Café Pho, an instant iced coffee product. Unlike traditional 15-minute drip coffee, the instant version quickly gained popularity for its convenient and swift preparation, resonating with consumers and restaurants.
The iced coffee segment was valued at approximately US$4 million during the Food Empire’s entry into the Vietnamese market. Now, Food Empire alone contributes to an annual sales revenue of US$60 million ($80.9 million) from the iced coffee segment in Vietnam. “We have replicated the traditional way of drinking coffee,” says Tan.
Revenue and inflation
Even though it is locally based, Food Empire has a limited presence in Singapore. However, Tan is pleased that its instant bubble tea brand is now available at the supermarket chain NTUC FairPrice.
Still, he has no plans for expansion in the Republic due to the intense competition in the market. “We use our HQ here to suss out for opportunities within the region; there are a lot of M&A players and corporate advisors here. These guys will give us access to the rest of the region.”
Besides broadening its distribution and sales network globally, Tan has invested in expanding its manufacturing facilities in various markets. For instance, Food Empire opened its second coffee plant in India last year, which is now operating at nearly 100% capacity and has turned a profit in its first year.
Food Empire’s financial numbers have steadily increased. In pre-pandemic FY2019, it reported earnings and revenue of US$25.7 million and US$288.6 million, respectively. In 1HFY2023, earnings reached US$26.6 million, down 1.6% y-o-y. Revenue in the same period was up 11.8% y-o-y to a record of US$198.2 million due to higher volumes moved and higher pricing fetched from the various main markets.
In its 9MFY2023 business update, revenue rose to another record of US$305.1 million, up 6.7% y-o-y. The company attributes the higher turnover to a higher volume of products sold and at higher prices. The top line would have been higher if not for unfavourable forex, as the Russian ruble and the Ukrainian hryvnia depreciated against Food Empire’s reporting currency, the US dollar.
Revenue for the 3QFY2023 dipped by 1.6% y-o-y to US$106.8 million, mainly due to the lower y-o-y revenue from its Russian segment. The lower y-o-y revenue from the company’s Russian market was due to the ruble’s depreciation against the US dollar.
For 9MFY2023 and 3QFY2023, earnings fell by 14.8% y-o-y to US$42.3 million and 30.6% y-o-y to US$15.7 million, respectively. The numbers were distorted by a one-off gain of US$15 million recorded in 3QFY2022 from the sale of its building at Harrison Road. The 9MFY2023 numbers were also weighed down by foreign exchange losses of US$1.4 million compared to a gain of US$3.6 million in the year before.
Despite forex volatility, Food Empire does not have an active hedging strategy. Instead, the company prefers to mitigate exposure to such risks by building its products and branding, gaining stronger pricing power and providing more flexibility.
Higher shipping costs
Besides forex, part of the inflationary cost pressures came from higher shipping costs. Tan recalls paying US$14,000 for a container, compared to the pre-pandemic cost of US$2,000. “When costs are that much higher, that will affect prices the minute they arrive at the port,” he adds.
Navigating inflation is not unfamiliar territory for Tan. In 2007, soaring oil prices created substantial cost pressures, prompting Food Empire to adapt its cost structure. Tan reflects: “We have proven over the years that, you know, despite currency changes or depreciation, we have been able to continue to grow through product innovation and gradual price adjustment.”
He hopes that the inflationary and high interest rates will stabilise. “The only way to reign back the inflation is to increase the cost of funds. When the cost of funds increases, demand will go down. When demand comes down, people will produce less. That’s when you’ll have overproduction [of goods]. That’s when selling prices will go down. That’s what the government hopes to achieve. But we hope it won’t end in a recession,” Tan adds.
“Margins have been holding up pretty well because of its brand equity that it has built up over the years,” adds company advisor Foo Shiang Peow. “That is so because management can push the price due to its brand power.”
Buybacks and valuation
Food Empire has seen improved earnings, yet its current P/E at single digits suggests that the market has not fully acknowledged its value. While there are speculations about its potential as an acquisition target due to its modest valuation, Tan asserts that any such approach would be rebuffed. He has no plans to privatise Food Empire either.
Tan holds a 9.92% stake in the company, while his wife, Tan Guek Ming, a non-executive director, owns 11.99%, and CEO Sudeep Nair holds 12.45%. The largest shareholder is Anthoni Salim, chairman of Indonesia’s Salim Group, with a 25% stake. Tan describes Salim as a “supportive” partner, always ready to assist.
The modest valuation of Food Empire has impacted its business strategy. While seeking growth opportunities through acquisitions, the company has hesitated when potential targets demand valuations as high as 50 times earnings.
Meanwhile, Foo also says that one way Food Empire is trying to raise its valuation and beef up its returns is to buy back its shares as it taps its net cash balance of US$115.6 million.
He adds: “Unless, for compelling reasons, it will be more logical to buy back its own share than acquire others at a valuation higher than the company.”
As of Nov 16, Food Empire has bought back nearly 5.2 million of its shares from the open market under the current mandate, equivalent to 0.9747% of the share base. This brings the total bought back since 2019 to around 21 million.
“We will continue to buyback as long as we believe the share price is undervalued,” says Tan.
Here's what the analysts have to say on this counter.
