Food Empire Holdings - RHB Invest 2018-01-19: Diversifying Out Of Russia And The CIS Countries

Food Empire Holdings - RHB Invest 2018-01-19: Diversifying Out Of Russia And The CIS Countries FOOD EMPIRE HOLDINGS LIMITED F03.SI

Food Empire Holdings - Diversifying Out Of Russia And The CIS Countries

What’s New? 

New upstream capacity in India. 

  • Food Empire Holdings (Food Empire) is embarking on a new manufacturing facility in India. Total expansion cost would be about USD41m, of which 73% is to be funded through bank borrowings and 27% by internal cash flows. The project is expected to be completed within three years, ie by end-2020.

Why India? 

  • At the moment, the group has a spray-dried instant coffee plant in India. While Food Empire does not distribute its products in the South Asian nation, it chose to embark on another upstream project there due to low production costs, export incentives, and availability of labour with expertise in running coffee plants.

Our View 

Not much financial impact in the near term. 

  • We note that the project is slated for completion by 31 Dec 2020. Therefore, we expect the plant to only be commissioned in 2021. 
  • Currently, Food Empire is in a net cash position and is FCF-generative. As such, net gearing is likely to remain very healthy at ~0.1x, even if it draws down the full USD30m in banking facilities this year.

Strong track record. 

  • The group has been able to ramp up its current instant coffee manufacturing plant to breakeven levels within a year. Including other food ingredients – ie non-dairy creamer and snacks – its upstream projects now contribute ~10% of Food Empire’s total revenue.

Positive in the longer run, diversifying out of Russia and other Commonwealth of Independent States (CIS) countries. 

  • We note that the expected capex for the new manufacturing plant (USD41m) is much higher than that of the group’s current spray-dried instant coffee plant (USD24m). As such, we think the new plant could be either of higher capacity than the current facility or be used to manufacture other higher-value food ingredients. This could suggest stronger revenue contributions when compared to the current instant coffee mix plant. As such, we are positive on this development in the longer run, as it suggests diversification outside of Russia and other CIS countries.
  • At the moment, Vietnam is contributing ~17% of topline, with food ingredients and the rest of Asia contributing 10% and ~10% respectively as well. While Russia and other CIS countries remain Food Empire’s core markets, we believe that – with a concerted effort to grow new markets (eg China and Myanmar) and the new coffee plant being commissioned in 2021 – the group could see at least 50% of revenue coming from Asia in 3-4 years time.

Our Top Pick for 2018, maintain BUY and SGD1.00 Target Price (43% upside). 

  • In the near term, we continue to like Food Empire for the potential margins expansion, which would be driven by the RUB’s appreciation and improved profitability in the food ingredients segment. 
  • We think any impairment from Caffè Bene should come in 4Q17’s results, and are unlikely to affect future earnings.

Juliana Cai CFA RHB Invest | http://www.rhbinvest.com.sg/ 2018-01-19
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