January 3

2024 Review: Is the Food Empire share price and dividend still worth it?

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Food Empire has shot 226% since its price of $0.50 on 3 October 2022.

The question is,

Will it continue to shoot higher, for longer?

Or is this the sign of an impending crash?

I dug into the company to find out.

To be clear,

  1. I’m not a financially trained analyst, so whatever information you read here should be used with your own due diligence.
  2. If you’re looking for close studies of their discounted cashflows, modelling, I don’t have it. I don’t even know how to do it. We study more qualitative factors, with the basic quantitative checklists being passed through with the help of Stockopedia, a stock screening software.

How we discovered Food Empire

Food Empire has appeared at the top of the Stockopedia StockRanks for some time. If you don’t know how we use Stockopedia, you can read here.

Full disclosure too: I don’t get paid to promote any of their services.

And if you look at the above, what stands out is a few things.

What’s the business?

First off, let’s start with its business.

With all the negative news around Russia, you would have thought it pretty dangerous to do business there.

But Food Empire’s biggest market segment is the Russian region.

You might think it dangerous to do business in Russia, but you can see here that Food Empire makes the most money there.
You might think it dangerous to do business in Russia, but you can see here that Food Empire makes the most money there.

Their product?

Instant coffee.

Of course they sell other things, but their biggest revenue contributor remains their beverages segment.

Driving growth with different products

Food Empire has not stayed stagnant in its market leading segment of selling instant coffee. Instead, it has consistently tried to stay ahead of the pack, by expanding into new segments. From the numbers below, you can actually see that the biggest growth was registered in their ingredients segment, which grew 87% in revenue.

Amongst the highlights was how the ingredient segment grew 87%.
Amongst the highlights was how the ingredient segment grew 87%.

That’s not a small number.

Group CEO Sudeep Nair said in the 2023 Annual Report,

We expanded into ingredient manufacturing when we introduced our first non dairy creamer (NDC) plant in Malaysia in 2013.

I am pleased to highlight that the Group’s NDC facility is being expanded and the new capacity is expected to begin commercial production in 4Q2023.

Ramping up capacity is pretty amazing.

It is certainly another boost to their growth.

Drivers of growth in different markets, predominantly South Asia

But what was also important for me to see was how they were aggressively expanding into the emerging markets of South and Southeast Asia, primarily in Vietnam, India, and Malaysia.

Despite already succeeding in Vietnam, the company has not rested on its laurels and has moved into places like Cambodia.
Despite already succeeding in Vietnam, the company has not rested on its laurels and has moved into places like Cambodia.

If you’re unfamiliar with the spending power of Southeast Asia, it’s time to be tuned in. Singapore is right at the doorstep of one of the economic powerhouses of the world.

As McKinsey’s report on ASEAN shares, if ASEAN were a single country, its GDP would be $2.4 trillion, or the seventh largest economy in the world.

The growth in the consumer class in ASEAN means that Food Empire is well positioned to ride on its growth.
The growth in the consumer class in ASEAN means that Food Empire is well positioned to ride on its growth.

But what’s vital to note is just how well Food Empire is placed to capture this demand.

Food Empire’s products are positioned at just under the middle income. If you were in Singapore, imagine a triangle like this.

Food Empire is positioned at the bottom, which places it in the prime position to capture the growing, emerging consumer class in these developing economies.

The growing operating leverage

Here’s another term that’s going to kick Food Empire’s profits to the moon.

Operating leverage.

If you look at the trend in terms of their operating profit, you would quickly see that their operating profit is rising much faster than its costs.

Sure, in its earlier days, when it was developing new factories to make these products, it would have had a bigger drawdown with its capital expenditures.

Once these factories get going though, it doesn’t take too much Capex to increase its capacity.

But if you look at the past five years, it has consistently maintained its Capex, whilst significantly increasing its ROCE.

In 2019, they had a big increase in Capex. Their 2019 Annual Report explained: “Property, plant and equipment increased US$30.4 million to US$99.3 million as at 31 December 2019 mainly due to the expansion of the Group’s subsidiary, Indus Coffee’s manufacturing facility in India.”
In 2019, they had a big increase in Capex. Their 2019 Annual Report explained: “Property, plant and equipment increased US$30.4 million to US$99.3 million as at 31 December 2019 mainly due to the expansion of the Group’s subsidiary, Indus Coffee’s manufacturing facility in India.”

But if you look at its Return on Capital, this has skyrocketed over the past few years.

This incredible quality of earnings is certainly something to marvel at, considering that its a consumer products company.

Share buybacks

The company has also been smart in how it has employed its capital, by aggressively doing share buybacks.

As of 31 December 2022, the company had, pursuant to the Share Buyback Mandate approved by our shareholders at the 2022 EGM, purchased an aggregate of 5,327,900 shares through a series of open market purchases.

Executive Chairman Tan Wang Cheow, in his 2022 Annual Report

The founder of Stockopedia Ed Croft, talks about how this is akin to

‘companies eating themselves’.

It’s true.

If you look at the larger markets in the US, Apple has been by far the most successful example of this.

Apple is a great example to learn from in terms of share buybacks.
Apple is a great example to learn from in terms of share buybacks.

What’s next?

You might look at the share price growth over the past few years and think,

Well, Food Empire has had a good run, but it may not rise any further.

What’s going to catalyse its growth?

Well, I think there are multiple reasons.

Firstly, I’m betting that as they capture more of the Vietnamese market (which is today their second biggest market after Russia), they would also begin to capture the rest of Southeast Asia.

Vietnam is fast becoming seen as the ‘next Singapore’ because of how quickly its people are growing in terms of per capita income, and their education.

This also means that Food Empire’s expansion into Vietnam might be an experiment into how they capture the rest of Southeast Asia. Already, you can see them moving into Cambodia, test running their products, and seeing how the markets react.

Secondly, I believe that the general consumer will become more sensitive to price changes in an era of inflation, and therefore pick something that’s more budget friendly. When your traditional mid-market consumer shifts downwards (in choosing cheaper products) in their purchase behavior, you get a growing market.

Lastly, the ingredients market will provide a kicker to their growth. With this segment aimed at the B2B market, where they are selling to big corporations (think of the likes of airlines offering you a creamer on the coffee on your flight), there is definitely room to grow.

Your money, your call.

 


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