Tuesday, 13 June 2017

Food Empire Holdings


My first encounter with Food Empire was way in 2003. I was intrigued and impressed by that a Singapore company is the top seller of coffee in Russia and other emerging markets. Being relative new in investing then, I bought and sold to take small profits and took losses with small movement. Best performance then was a 70% gain from late 2006 to early 2007 when price surged from $0.525 to $0.905.

It went out of my radar after the financial crisis in 2008. Finally took a look at it again in early 2014 at $0.41, thinking that the price was pushed down too much due to the Russia, Ukraine crisis. 

Probably took up a position too early as the crisis lingered longer. Sold, bought, sold during 2015 to 2016 as shown in the diagram. And with all these buys and sells, my overall gain is only 9.7%. Of course the gain would be more if I am committed to my purchase reason and did not sell when the price went up to $0.32. Well, if only....


The turnaround continued in the second half of 2016 and price moved up with it. I decided to average up as I am positive about the counter for the coming year.

Business
From the company website:
"Food Empire Holdings (Food Empire) is a global branding and manufacturing company in the food and beverage sector. Its products include instant beverage products, frozen convenience food, confectionery and snack food. 

Food Empire’s products are sold to over 50 countries, in markets such as Russia, Ukraine, Kazakhstan, Central Asia, China, Indochina, the Middle East, Mongolia and the US. The Group has 24 offices (representative and liaison) worldwide. The Group operates nine manufacturing facilities in India, Malaysia, Myanmar, Russia, Ukraine and Vietnam."

Hence, Food Empire operates in a competitive landscape with inherent risk as the products are sell in emerging markets.

Why invest now?
So why buy into this company with such unfavourable conditions? And how does it end up to become my largest holding?

1. I see Food Empire as a turnaround story with positive performances in the coming quarters. The belief in the company is more qualitative rather than based on historical track record. If you look at the numbers, you will see that despite increasing revenue, earning is lumpy and can be totally wept out in a crisis. Having said that, despite going through two major crisis, the company has grown bigger as seen by its equity and net asset value.








The company does give out dividend in good years. On average, payout ratio is around 20% to 30%. So, I do expect dividend to increase as the turnaround continues.

2. I am quite impressed by how the management has managed the two crisis that they have gone through and became stronger after that. Especially in the recent crisis, the company did not focus on just cost cutting but continue to look for way to diversify. Today's results is due to the seed planted a few years back. From growing business beyond Russia, Ukraine and CIS countries to growing upstream into production of ingredient, all these initiatives started in 2012/2013.


As seen from the table above, other countries (including Indochina) now contributes more than 40% of its revenue. This is indeed phenomenon as compared to only 11% in 2012. Indochina's market especially Vietnam has done so well that the company now consider it as a separate segment. What is more interesting is that beyond Indochina, other countries continue to grow from 10.5% in 2014 to 21.5% last year.

Besides diversification geographically, the company also gone upstream into production of ingredients. Again, that has done well and it now contributes 4.3% of its revenue. Moving ahead, it should continue even more as the company ramps up the production in its India plant.


3. I become more confident of the company after attending the AGM. Brief pointers of AGM can be found hereMy personal perception is that Chairman Tan Weng Cheow and CEO Sudeep Nair have good dynamics between them and together they should be able to bring Food Empire to greater height. 

In fact, the change in Food Empire highlighted in point 2, coincides with the appointment of Sudeep Nair as CEO while Tan Weng Cheow takes on the role of an Executive Chairman. In 2012 annual report, Mr Tan highlighted their different roles. 

"Mr Nair will take over the overall oversight of the Group’s day to day operations, while I, as Executive Chairman will continue to focus on the long term strategic objectives such as developing new markets exploring opportunities for acquisitions as well as enhancing in-house production capabilities."


4. The recent purchases by CEO provided a confident boost. As the saying goes, there is a lot of reasons for an insider to sell but there is only one reason for insider to buy.







When will I sell?
I hope I never gets to sell it as I am quite excited about its current growth. However, if its execution in other markets and ingredient market hit a barrier, I might trim down my holdings. Of course, it the valuation goes way beyond its fundamentals, I might sell too.

Conclusion
Food Empire is a company that I am familiar with. Its market concentration in Russia, Ukraine, Kazakhstan and CIS countries has always been a concern. However, what happened over the past five years provided me with hope that the company is finally overcoming this issue. Of course, its results is still going to be affected by political issue, and currency fluctuation but with increasing contribution from other markets, I believe that the effect might not be as devastating. I am also excited about its ingredients business. Still small at the moment but it provides growth opportunities. 

With a clearer understanding of its recent development, I am now more confident in having Food Empire resides among my top few holdings.

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