Food Empire Holdings

26 Dec 2006 Tuesday

The company's history can be traced back to 1982 when Future Enterprises Pte Ltd (FESPL) was incorporated to market and distribute PCs and peripherals in Singapore. Since the early 90's, the Group has been a food and beverage company that manufactures and markets instant beverage products, frozen convenience food and confectionery. It also has a wholesale business that trades in frozen seafood.

Its principal activity is that of manufacture instant beverages and food products, such as frozen convenience food and snacks under its proprietary brands MacCoffee, Klassno, FesAroma, OrienBites, MacCandy and Kracks.Its products are exported to more than 50 countries in major markets, such as in Russia, Eastern Europe, Central Asia, Indochina, Southeast Asia, Australia, Middle East and USA.

The exports are marketed and distributed through its 18 offices (liaison and representative) in Russia, Ukraine, Kazakhstan, Uzbekistan, Turkey, Iran, Poland, Belgium, Bahrain, Mongolia and others. It has four manufacturing facilities in Asia and Russia.

Step #1: Strong consistent sales & earnings growth that looks predictable into the future...

Food Empire has demonstrated consistent and impressive growth over the past 5 years (2000 – 2005). The compounded average growth rate for sales and profit during this period is a whopping 22% and 34% respectively. There is only a blip during the SARs period where sales and profit dipped, but nevertheless still registering a net profit.

For the year of 2006, the sales and profit up to 3Q has already matched up to the levels of 2005. We can definitely expect growth to break through the ceiling for the whole of 2006.

Step #2: Conservative Financing with total debt less than a single year's net earnings...
As at Nov 2006, long term loan stands at $6.2m, well below the net profit of $22.4m at 3Q, definitely healthy. The company also holds $40.47m in cold hard cash in the bank, which is sufficient even to meet all its current liabilities.

Step #3: Consistently high ROE, above 15% each year...
Food Empire Holdings has achieved consistently high ROE for the past 4 years successively.
FY 2006 ROE of 21% (projected)
FY 2005 ROE of 20%
FY 2004 ROE of 21%
FY 2003 ROE of 16.9%

Step #4: Intelligent Capital Allocation, where retained earnings are used for growth not maintenance...
Food Empire Holdings’ primary strategy is on growing strong global brands, with its flagship brand Mac Coffee being a highly recognized and established brand in Russia and Ukraine. Depreciation of fixed assets stands at a miniscule $1.799m for the FY 2005. Cash expended in purchase of fixed assets stands at $3.799m. The opening of a plant in Russia was officiated by Defence Minister Teo Chee Hean in Sep 06 to take advantage of its rapid growth in Russia and Central Asia. This serves to also reduce import taxes imposed, which potentially could reduce costs and raise profits.

Step #5: The Business is easy to understand, and Management is open, honest and competent...
Food Empire is an F&B company focused in building strong brands in the manufacture of instant beverages and food products, such as frozen convenience food and snacks under our proprietary brands MacCoffee, Klassno, FesAroma, OrienBites, MacCandy and Kracks. Food Empire’s extensive portfolio of brands has become household names in many lands.

It has a foothold firmly established in Russia where its flagship MacCoffee 3-in-1 coffee is the best selling in the market. To date, Food Empire has sold more than 2 billion servings of serving around the world.

All the directors are substantial shareholders of Food Empire holdings with holdings from 2.57% to 14.41%. We can be assured that their interest are aligned as owners of the company.

Step #6: 2x5y= Business/Industry Prospects indicate Earnings could Double in 5 years...
Central Asia is a rapidly growing region with rising affluence after rising out of communism. Markets such as Russia, Ukraine are not as developed as those in US and UK. Other than the growth story of China, India and Vietnam, Central Asia is unchartered territory where little information is known. The growth potential of Russia should not be underestimated given its large land mass and also huge population of 144 million with Ukraine’s size of 47million, presents a huge market for Food Empire. The growth rates for Russia for the pas 4 years has been consistently above 5%, though nowhere near China’s staggering 9-10%, is still pretty impressive.

2003 – 7.2% GDP
2004 – 7.4% GDP
2005 – 6.4% GDP
2006 – 7% GDP

If the economy of Russia takes off, the prospects could potentially be mind boggling - Russia could be the next China story.

Food Empire has been awarded the Top15 Most Valuable Brands Award in Singapore for the 4th year running (2003 – 2006), ranking alongside giants such as SIA, Creative, DBS. It is rated 14 place, ahead of Creative who is in 15th place. In Ukraine, Food Empire’s MacCoffee 3-in-1 Coffeemix wins "Choice of the Year 2006" again for the 5th year running (2001 , 2002, 2003, 2005, 2006) as the best 3-in-1 coffee. We can see that Food Empire has successfully created a strong brand in the minds of the consumer.

Step #7: Sustainable Competitive Advantages are in place...
Food Empire has 2 moats built around its business, the first being the strong brand it has established as evident from the array of awards and ratings it had obtained. The 2nd is the barrier to entry in doing business in Central Asia. Food Empire has established a first mover advantage in doing business in this region and this will certainly give it headstart against potential competitors interested in doing business there.

Step #8: Attractive Valuation...
Based on a growth rate of 15% and zero terminal value for 10 years, the estimated discounted cash flow from the business is $0.863. At the current price of $0.575, the value of the business represents a 33% discount from the DCF value of the business.

Decision: The business is good and fundamentally sound, with lots of growth potential as it operates in a relatively unchartered region where few dare to venture. Management manages the business in a transparent fashion. At $0.575, the stock will provide a net safety margin of 30%. I just bought substantial shares of this company, and will buy more if it falls.