Food Empire Holdings - RHB Invest 2018-01-17: Overhang From Korean Drama

Food Empire Holdings - RHB Invest 2018-01-17: Overhang From Korean Drama FOOD EMPIRE HOLDINGS LIMITED F03.SI

Food Empire Holdings - Overhang From Korean Drama

What’s new? 

Caffè Bene has filed for a court-led corporate rehabilitation process. 

  • Caffè Bene is Food Empire’s 22%-owned associate. It has been undergoing financial difficulties due to excessive debts assumed prior to the investment made by the group. 
  • We note that Caffè Bene recently filed for a court-led corporate rehabilitation process and is currently awaiting the court’s approval.

Our view 

Caffè Bene has been an overhang for the stock. 

  • Caffè Bene was loss-making prior to Food Empire’s investment in 1Q16. The group bought into the coffeehouse chain as an opportunistic investment into the downstream retail platform – something that it did not have. Food Empire initially expected Caffè Bene to turn around in 2018. It also saw future opportunities in supplying some of its products to Caffè Bene.
  • While Caffè Bene has progressively pared down some of its debt, it still holds a substantial amount. In addition, due to many legacy issues, the turnaround has been slower than expected. 
  • As at 9M17, the share of associate losses from Caffè Bene has dented Food Empire’s earnings by USD1.3m. We note that the underperformance of the former has been a continual drag on the latter’s results – and highlighted the potential risk of asset impairments in its 4Q17 results, if its performance failed to improve (see our 10 Nov 2017 report titled Food Empire: Buy More Food Ingredients for more details).

The “Caffè Bene” Korean drama. 

  • Although our ongoing conversations with Food Empire seem to suggest that the coffeehouse chain has resolved the bulk of its legacy issues, 4Q was challenging for Caffè Bene as it is a seasonally weak quarter. 
  • The tightness in working capital during the low season, exacerbated by the pullback of bank loans, made normal daily operations difficult for Caffè Bene. As such, it has filed for the corporate rehabilitation process. This exercise, if accepted by the court, would provide some relief from its creditors, allowing the firm to reorganise its business back to profitability.

Enough of the melodrama – just wipe the slate clean for 2018. 

  • Since Caffè Bene has filed for corporate rehabilitation, we think there would be an impairment of assets in the current full-year results. Given that a court-led business organisation might occur over a fairly long period of time, we believe it would be most prudent for Food Empire to take this opportunity to kitchen-sink its entire Caffè Bene exposure, and have a clean slate for 2018’s earnings. 
  • Based on our estimate, the group has an exposure of around USD10m to Caffè Bene, representing 4% of its market capitalisation. We think this is the maximum impairment if Food Empire writes off its entire equity stake in the coffeehouse chain and shareholder’s loans. 
  • Nevertheless, we note that the eventual quantum of Caffè Bene’s impairment is subject to management’s assumptions, as well as an auditor’s review.

Maintain BUY, with an unchanged Target Price of SGD1.00. 

  • Food Empire remains our Top Pick for Singapore’s consumer sector this year (see report: Consumer Sector - This Year, We Spend). This is because we continue to be positive on its margin expansion from the appreciation of the RUB, and improved profitability at its food ingredients segment. 
  • The group’s core businesses in instant coffee mix and food ingredients also remain intact despite the potential impairment from Caffè Bene.

Juliana Cai CFA RHB Invest | http://www.rhbinvest.com.sg/ 2018-01-17
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 1.000 Same 1.000