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Food Empire: A Silver Bullet Amidst The Russia-Ukraine Crisis
In March, Russia completed the annexation (acquisition and incorporation of territory) of Crimea into its nation. The move upset Ukraine and was viewed as an act of hostility. Over the weekend, Ukraine sent troops to its eastern cities, which borders Russia’s southeast perimeter.
The escalating geo-political struggles between the two nations have injected uncertainty into a Singapore-listed company, Food Empire Holdings’ business outlook. Based on its FY13 results, the firm derived 58.2 percent of its revenue from Russia as well as 31.7 percent from Eastern Europe (eg. Ukraine) and Central Asia.
Its products include instant beverage products, frozen convenience food, confectionery and snack food. MacCoffee, Food Empire’s flagship brand, has been consistently ranked as the leading 3-in-1 instant coffee brand in its core markets: Russia, Ukraine and Kazakhstan.
For the past five years, Food Empire’s revenue has risen at 18.2 percent compound annual growth rate, from $134.8 million, to $262.9 million in FY13. Over the same period, its net profit margin (NPM) has ranged between 2 percent and 8.6 percent.
The NPM fall seen from FY12 to FY13 was attributed to various factors including increase in advertising and promotion activities, increased staff costs, foreign exchange losses, investments in new markets and the start-up costs associated with its green-field projects.
As part of its green-field projects, Food Empire completed construction at its non-dairy creamer plant and snack factory in the Iskandar region of Johor Bahru, Malaysia, in 2013. Both facilities are expected to be fully operational by 2Q14.
Food Empire’s packaging plant located in Port Klang, Malaysia, is awaiting various certificates before commencing production. In early 2015, an instant coffee factory in Andhra Pradesh, India, is expected to expand Food Empire production capabilities.
With all these capital expenditure, Food Empire’s debt to equity ratio has risen from 4.7 percent in FY09 to 19.4 percent in FY13. On the asset front, net asset value (NAV) per share has grown from US$0.2338 to US$0.3115 over the same period.
Apart from inorganic growth targets, Food Empire has changed its business model in Russia and Ukraine since the start of 2013. Previously, Food Empire would procure and sell raw materials to an entity in Russia, who is its major customer, which produces Food Empire’s products before disseminating them to its distributors.
With the new business model, Food Empire handles the entire production process before selling the products to its distributors. Although the new business model offers better gross margins, Food Empire is faced with higher staff costs, inventory levels as well as exposure to currency risks.
Investment Merits
• Eyeing growth in Southeast Asia, Middle East and Africa
• Strong consistent revenue growth
• New facilities provide greater flexibility and control over the supply and prices of Food Empire’s key ingredients; reducing uncertainties surrounding commodity prices
• Healthy net asset value (NAV) per share growth backed by healthy debt to equity ratio
Investment Risks
• Market saturation within Food Empire’s core markets might limit future growth
• The Russia-Ukraine could prolong, affecting trade and consumers’ lifestyle
• Customers could opt for other instant coffee brands in the market
• As spending power increases, consumers could choose to visit cafes and restaurants for their coffee fixes
• Unsuccessful ventures in countries outside its core markets
SI Research Takeaway
As the Russia-Ukraine crisis persists, I would expect companies conducting businesses within the two countries to be adversely affected. However, I think consumer staples entities might fare better given that food and beverage consumption are part of everyone’s daily affair.
Additionally, upside could be gained from the increased manufacturing capacity of Food Empire’s new facilities in Malaysia and India which might reduce overall production costs and ultimately, improve the firm’s margins.
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