Why I buy 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 here. My 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.

Is it time to sell and take some profit?

The Singapore market has done well for the first half of the year. Including dividend, STI ETF has returned about 14%. Till date, my cash portfolio has returned about 41%. The bulk of the return is contributed by the following four counters:

Best World - 143%

Valuetronics - 70%

Food Empire - 46%

Micro-Mechanics - 41%

In general, I use the following as a guide to determine my sell decision. Hence, I will run through them for the four counters.

a. The fundamentals of the company has deteriorate

b. The company is overvalue at the current price

c. To raise cash for a better buying idea

d. To raise cash for other reasons

Fundamentals of the company

All the four companies reported stronger revenue and net profit for the latest quarter. Hence, fundamentals stay strong and unless there is unforeseen circumstances, they should continue to do well for the remaining year.

Valuation of the company

All the price has run up quite a bit, hence valuation is definitely not cheap but are they overvalue?

Best World is trading at a historical PE of 24.9 but assuming a 30% growth this year (net profit grew by 63% in 20171Q), the assumed forward PE will be 19.1 with a PEG of 0.83. It is becoming more expensive but if it can maintain its growth, then the price is still reasonable. I would continue to monitor its quarterly report.

Valuetronics is trading at a historical PE of 12.9 and PE (cash) of 8.0. Again, assuming a 30% growth this year (net profit grew 70% in 2017Q3 and 47% in 2017Q4), the assumed forward PE will be only 9.2 and PE (cash) of 6.2. Current dividend yield is 4.2%. Definitely not overvalue.

Food Empire is trading at a historical PE of 19.5. If company grows by 30% (net profit grew 57% in 20171Q), the assumed forward PE will be 15.0 with a PEG of 0.65. Not cheap but definitely not overvalue especially when the growth potential is high.

Micro-Mechanics is trading at a historical PE of 14.6. Assuming net profit grow by 12% for the year (net profit grew by 23.5% in Q2 and 26.6% in Q3), PE would drop to 13.1. With the increase of its interim dividend to 3 cents in 1H, I expect similar dividend of 4 cents for the full year, which gives a dividend yield of 5.5% at current price. Definitely not overvalue.

To raise cash for a better idea

Currently, do not have any solid new idea. Even if I have, I would sell my other holdings.

To raise cash for other reasons

Currently, do not require cash for other expenses. Hence, not necessary.

Conclusion

While the four counters have given me very good return, their fundamentals remain sound and are not overvalue. With no new idea and I do not need cash currently, I will continue to hold on to them.

Asset Allocation

"Despite what many people think, one of the most important investment decisions you can make is not what particular stocks or securities you buy, but how you allocate your

investable funds to the various asset classes."

- "Introduction to Personal Investing", IMAS

I was intrigued when I first came across the above statement. While asset allocation has been on my mind, it has never come across as important and hence I have never put down in writing. 

So why now?

I am a few years into my 40s and I can sense that I am getting more sensitive the systematic risk of stock market underperformance for a long period of time. This is due primarily to my larger portfolio as compared to a decade ago, hence the same percentage drop is going to be more painful now than before. Also, my time to recovery from a market crash will get lesser each year.

With my review of my goal and strategy in 2015, and rebuilding my portfolio in the last 2 years, I think it is now an appropriate time to put this down in writing. This will add another dimension in my approach and guide me as I work towards improving or just sustaining my performance.

In general, asset is classified into four categories - cash, bond, properties and stock. In the past 17 years, I have primarily focused on cash and stock. Moving forward, it should still be the same. 

I am not looking into property investment as I am wary on holding large debt that required high amount of monthly payment,  Of course one can argue that the rental should cover should cover the monthly loan and we just need to wait for the next upturn in property market for capital appreciation. However, as this is not my area of competency and I am currently not that incline to learn about it, I would give it a miss.

Also, I am not into bond due to personal preference on stable dividend stock. Having said that, this is not a never never.  I am probably going into SSB soon (though I feel like it's more of a FD nature), and in a few years time if my asset grew larger (and I am older), I might allocate some into bond.

Hence, the allocation exercise for the moment will simply between cash and stock. Having two young kids, I decided that at least I must have two years of reduced expenses as emergency fund.  Also, knowing that I have a moderate risk appetite and my interest in stock investing, I am going for a 30% cash - 70% stock allocation from now till I am 50. Will do a review at 50, to see if there is a need to change the allocation.

Combining the above, it means that at any one time, I would have at least 2 years of reduced expenses or 30% cash whichever is higher.  This provides a form of security which allows me to invest the rest without worrying too much about market performance. In the sense that if market continues to do well, my 70% will ride the bull. On the other hand, if the market crashes for one reason or another, the cash beyond the emergency fund will provide me an opportunity to buy into the good counters at a temporary depressed price.

Finally, this asset allocation will be checked and balanced bi-annually.

Top 10 Counters Quarterly Reporting (April to June)

All my counters have reported their performance for the period. Below is a short summary of my top 10 counters' performances. 

Food Empire reported its 20171Q results on 11 May. An excellent set of results as its revenue is up by 23.6% and net profit up by 57.2%. The performance is attributed to appreciation of Russian Ruble against the USD, change of business model in Kazakhstan and CIS markets, and higher sales in ingredient segment. The drop in Indochina market is due to different festive timing. 

Looking forward to the next quarter results with eyes on its Indochina and ingredient segment.

RMG reported its 20171Q results on 23 April. As expected, its revenue and net profit are flat, dipping by 1.7% as compared to 21061Q. Its expansion plan is within timeline with Raffles Hospital Extension to open in Q4. The group also recently acquired a land with an in-construction building in Chongqing for a 700-bed international tertiary hospital. This will be completed by 2Q2018, earlier than the Shanghai Hospital what is slated to be ready by end 2018.

I think the group is doing well as it is able to maintain its profit amid its expansion. I will continue to hold on to my stake and participate in its script dividend (latest at $1.26) scheme. Expect to see the benefits from its expansion from 2019 or 2020.

PLife reported its 20171Q on 24 April. DPU for the quarter is up by 9.6% due to its divestment gain in 2016. Recurring DPU goes up by 2.2%. As highlighted in its presentation, it has strong capital structure. There is no long term re-financing cost till 2019, interest cover of 10.0 times and gearing at 36.7%. 

While its share price is trading at a premium to NAV, I believe the quality of this REIT deserves that. This will stay in my portfolio for a long time.

Straco reported a decent set of 20171Q results on 9 May. Revenue is up by 4.2% with net profit up by 6.9%. It has reported a double digit growth in the visitation number to SOA, while number of visitors to UWX grows by 9.7%. Singapore Flyer's visitor number is stable but revenue grow increased on better yield and F&B revenue.

As mentioned before, I like its cash business and am hopeful that dividend payout will increase in a few years time when they pare down their debt.

Best World International Limited
Best World reported another excellent 20171Q results on 9 May. Revenue is up by 27.0% and net profit up by a whooping 63.1%. The excellent performance is attributed to the tremendous growth in of 110% in its export segment (read China market). The increase is attributed to backlog and inventories building as demand is expected to be high. It could be that while Q2 results continue to be positive, it might not see the jump seen in Q1. Slight concern is the drop in Taiwan DS for 1Q but management has guided subdue growth for the year.

My stance remains unchanged. China market provides huge potential for its growth but it has garnered lots of attention and price has gone up a lot since the award of its China DS license. Expect volatile price movement and huge drop if any of the coming quarters perform below expectation.

Valuetronics reported its 2017 full year results on 25 May. After deciding to exit mass LED market in 2015 and moving into automotive sector in2016, Valuetronics finally turnaround its results. Revenue is up by 16.5% and net profit grows by 27.9%, one of the highest since it has listed. The improvement is also attributed to a surge in order on wireless LED since 21063Q. While I am not in the industry, I believe it will go in the way of mass LED after a few years. Nevertheless, it's good business for the next few years. The group is undergoing qualification by another automaker and expect to obtain approval by late FY2018. 

With 1-to-10 bonus and maintaining its dividend, this had indirectly increase my dividend by 10%. I am hopeful of the group's performance for the next few years, so will continue to hold on to my stake.

FCT reported its 20172Q on 25 April. Revenue dipped by 2.9% and net profit income by 3.3%. However, tt has maintained its DPU at 3.04 cents. All these are achieved despite AEI work for Northpoint with average occupancy of about 63% during this period.

Will continue to hold FCT for its resilient position.

Singtel reported its full year results on 18 May. Revenue dipped by 1.5% for the year and net profit excluding exceptional item goes up by 0.9%. Singtel continues to pay a total of 17.5 cents of dividend at a payout ratio of 73%. Singapore and Australia provided stable return but India Airtel affected by price war due to new operator.

Will re-evaluate position after its Netlink IPO.

Micro-Mechanics reported its 20173Q results on 28 April. For the second consecutive quarters, it has improved its revenue and earning. For 9M, revenue is up by 9.0% and net profit up by 12.8%. It does seem that their strategical review last year to focus the engineering, development and investment efforts of the Group’s five factories on serving the semiconductor industry is working. Utilisation rate has gone up to 59% for Q3.

It seems that Micro-Mechanics will do well for the next few years and with its dividend policy of not less than 40%, this should continue to be a good investment.

Starhill Global reported its 20173Q results on 27 April. Gross revenue dipped by 0.6%, net profit income dipped by 0.9%, income available for distribution dropped by 3.1% and DPU dropped by 6.3%. This has been a tough year from SG Reit due to lower occupancy of office space especially at Wisma Atria, and re-positioning of the China mall. The positive comes from Lot 10 rejuvenation and upcoming AEI at Plaza Arcade.

I am satisfied with the current DPU and actions taken by the management. Should see better performance in 2018.

Buy and Sell actions in May

My actions for the month of May.

1. Added more Food Empire @ 0.535. Felt gutted that it dropped to 0.535 not long after my last purchase at 0.58. Decided to take the opportunity for me to accumulate further.

2. Sold Isoteam @ 0.37. Decided to let it go after its lacklustre 1Q performance and my indifference towards learning more about its business. Made a small gain of 4.9%.

3. Bought Jumbo @ 0.655. Was quite surprised for its more than 10% NPM. Decided to take a small position to punt on its success in its overseas expansion.

4. Bought Kingsmen Creatives @ 0.61. Have been waiting to re-invest in this familiar counter. Bought it rather impulsively after reading various discussion on it. Think that this could be the turnaround year and am satisfied with current dividend yield of 4%.