Update on Food Empire Holdings - 26 Mar 07

Since posting in 26 Dec 06 on Food Empire, the stock has risen more than two thirds (about 80%) from $0.585 to $1.05. With the latest results and acquisition of another coffee company, let us re-assess the value of the company and see if it is over-valued.

1. Blistering FY2006 results

From the chart, we can see that Food Empire has once again did it, another year of record growth. Revenue rose by about 46% and net profit rose by 30%, impressive growth! ROE for FY2006 was also wonderful @ 19%

2. Acquisition of potential rival

Food Empire acquired the popular brand of instant coffee mixes Petroskaya Sloboda. This brand commands a 22% market share in Ukraine and 6% in Russia. With its orginal market share of 49% with the MacCoffee brand in both Ukraine and Russia, Food Empire now controls about 71% of the entire Ukraine and 55% of the entire Russia instant coffee market, giving it a very dominant market position. Definitely a very strong competitive advantage enough to deter potential competitors from entering !

3. Instrinsic Valuation

Taking a risk free yield of 5%, and giving it a 20% growth rate with zero terminal value, the net present value (NPV) of the earnings over 10 years is estimated to be $1.23. The current price of $1.05 represents only a 15% discount over its intrinsic value. If we consider a more conservative growth rate of 15%, the value is $1.05, no discount at all based on current price.

Decision

No doubt the growth engines of the company are at full steam, however, based on Benjamin Graham's approach of buying only when the safety margin is at least 50%, current prices warrant a HOLD approach, re-entering only when we see price of the stock coming down. In addition, current price places the PE at about 16, not exactly very cheap (though not expensive either). I personally have sold out all, but waiting at the sidelines to re-enter.