Food Empire Holdings (FEH SP) - UOB Kay Hian 2017-03-02: 2016 Full Turnaround Achieved, Back To Paying Dividends

Food Empire Holdings (FEH SP) - UOB Kay Hian 2017-03-02: 2016 Full Turnaround Achieved; Back To Paying Dividends FOOD EMPIRE HOLDINGS LIMITED F03.SI

Food Empire Holdings (FEH SP) - 2016 Full Turnaround Achieved; Back To Paying Dividends

  • 2016 results came in within our expectations, completing the comeback from a breakeven year in 2015. 
  • The group has declared a dividend which came as a surprise, signalling management’s confidence. 
  • We are optimistic about Food Empire’s fortunes moving forward due to a stable Russian rouble, strong growth prospects in Indochina and proven pricing power in the CIS region. 
  • Maintain BUY with an unchanged PE-based target price of S$0.78.


Food Empire Holdings’ (FEH) 2016 results. 

  • Results were in line with our estimates with 2016 net profit to shareholders coming in at S$14.5m vs our estimate of S$14.3m.
  • Revenue grew 4.2% yoy mainly attributable to higher sales in Russia, Indochina, the Middle East, non-dairy creamer plant in Malaysia and instant coffee plant in India. 
  • In local currency terms, both Russia and Ukraine recorded higher revenue due to higher ASPs. In Kazakhstan and the rest of the CIS markets, sales fell 24.1% in US$ terms due to weakening local currencies and softer consumer sentiment.

Resumed dividend shows FEH’s confidence. 

  • In a previous strategy piece “Dividend Plays To Crow About” we highlighted the possibility of FEH surprising us with a dividend for 2016. 
  • FEH has declared a dividend of 0.6 S cents/share for 2016 after omitting dividend payments in the preceding two financial years. Management of FEH chose to conserve capital as crisis broke out in its key markets Russia and Ukraine two years ago.
  • Reinstating the dividend albeit a small amount signals management’s optimism over the outlook.


Higher sales in local currency terms. 

  • FEH’s core markets are Russia, Ukraine and Indochina. In these three markets, FEH recorded an increase in revenue in local currency terms. This cements our belief of the pricing power that FEH has, especially in Russia and Ukraine, owing to their huge coffee mix market share in these countries. 
  • Indochina remains the bright spot for growth as sales rose 41.1% yoy in 4Q16 and 24.2% yoy in FY16. The group has been engaging in aggressive advertising and promotion activities in Vietnam to capture more market share in this fast growing market.

Stable outlook for Russia and the rouble. 

  • Russia’s macroeconomic picture continues to demonstrate a long-awaited recovery for the Russian economy after two years of contraction prompted by low oil prices and Western sanctions. 
  • According to Economic Development Minister Maksim Oreshkin, Russia’s GDP is due to return to sustainable growth in 2017 of 2%. Since our initiation, the Russian rouble has appreciated slightly from 59/US$ to about 58/US$. We reiterate our view that further upside to the rouble would see upside to our target price.

Caffebene may turn out to be good business. 

  • FEH and Eastern Valley Group took an initial US$13.6m stake in the troubled South Korean coffee chain Caffebene in Mar 16.
  • Caffebene is one of the largest coffee house chains in South Korea with a presence of about 1,000 stores worldwide. According to businesskorea.com, Caffebene has shown good signs of tapping into the Middle Eastern coffee market. The chain was the first coffee franchise to receive the halal food certification on coffee beans and powder. Its latest store to open in Saudi Arabia saw sales exceed KRW200m in just a month after opening in Dec 16. As of 31 Dec 16, Caffebene is still in a loss-making position, but given the recognisable brand name and massive store count, Caffebene has the potential to contribute substantially should FEH manage to turn it around.


  • We introduce our 2019 earnings estimate and keep our 2017-18 earnings forecasts constant. 
  • As FEH has just started paying dividends again, we have elected to remain cautious and forecast a flat dividend of 0.6 S cents/share for 2017-19.


  • Maintain our BUY rating on the company with a PE-based target price of S$0.78.
  • Our target price is conservatively based on 2017F EPS of US$0.029 and pegged to peers’ average FY17F PE of 19.0x. 
  • We note that SGX peers Super Group was privatised at about 30x PE while Viz Branz was taken over at 16-17x PE.

Nicholas Leow UOB Kay Hian | Edison Chen UOB Kay Hian | http://research.uobkayhian.com/ 2017-03-02
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.780 Same 0.780