Food Empire Holdings Limited is Near its 52-Week Low: Is it an Opportunity?

man holding up falling arrow red arrow downwardFood Empire Holdings (SGX: F03) is a food and beverage (F&B) brand owner and manufacturer of instant beverage products, frozen convenience foods, confectionery, and snacks.

Its products are found in more than 60 countries which include Russia, Ukraine, Kazakhstan, China, and the US. The best-selling product of Food Empire is MacCoffee 3-in-1. As a Singapore-listed firm, it might be interesting for investors to know that Food Empire’s MacCoffee brand actually has fervent support in Russia, Ukraine, and Kazakhstan where it is recognised as a leading instant coffee brand.

In 2013, Russia contributed to 58.2% of Food Empire’s total revenue of US$262.9 million. The country has been a major market for Food Empire with Ukraine being the second largest revenue source. With the ongoing standoff between Russia and Ukraine, investors seem to be – almost understandably – fleeing from the company.

Over the past year, the share has languished with a loss of more than 40%. In comparison, the Straits Times Index (SGX: ^STI) has gained around 4% during the same period. At its current price of S$0.39, Food Empire is just 8.3% above its 52-week low of S$0.36. Does this present an opportunity for potential investors or should people shun this F&B firm? To help us obtain a clearer answer, let’s use a checklist formulated by the famous investor, Peter Lynch.

1) Is the Price-to-Earnings ratio low or high for this particular company and for similar companies in the same industry?

Food Empire is currently valued at 57 times its historical earnings. Comparatively, its locally-listed peer, Super Group (SGX: S10), is trading at a historical PE ratio of around 18. The general market, as represented by the Straits Times Index, carries a trailing PE ratio of 14.

It can be seen that Food Empire is valued at a huge premium as compared to Super and the Singapore market. However, it should also be noted that Food Empire is trading at an elevated PE ratio due to depressed earnings on the back of currency devaluations and the ongoing political turmoil in its key markets of Russia and Ukraine.

In its first quarter earnings report, the firm gave further colour on its currency picture:

“[The] Russian Ruble weakened from 32.7 Ruble per US dollar on 31 December 2013 to 35.7 Ruble per US dollar on 31 March 2014. Over the same period, Ukrainian Hryvnia weakened from 8.24 Hryvnia to 11.06 Hryvnia per US dollar.”

2) What is the percentage of institutional ownership?

One of Lynch’s primary reasons for including this criterion was because companies that were not picked up by  the ‘radar’ of institutional investors (big money managers) tended to offer better value since they would be less well-known in the market.

As of 13 March this year, Fidelity Investments, with a 9.9% stake in Food Empire, is the only institutional investor that’s classified as a substantial shareholder (i.e. a shareholder that holds a stake of 5% or more) of the company.

3) Are insiders buying and whether the company itself is buying back its own shares? Both are positive signs

The last time an insider of the company bought shares of the company was in May 2013. Tan Wang Cheow, Chairman and Managing Director of Food Empire, controls slightly more than one-fifth of his company currently.

4) What is the record of earnings growth and whether the earnings are sporadic or consistent?

For the past 10 years, net profit grew from US$7.2 million in 2003 to US$11.7 million in 2013. However, the record of earnings growth itself had been rather sporadic as seen from the table below.

Year Net profit (in US$, million)
2003 6.0
2004 9.6
2005 12.4
2006 17.5
2007 21.1
2008 21.1
2009 2.7
2010 13.7
2011 15.0
2012 20.5
2013 11.7
Last 12 months 3.1

Source: S&P Capital IQ

5) Does the company have a strong balance sheet?

As of 31 March 2014, the firm had total debt of US$37.2 million and a cash balance of US$27.3 million. It is in a net-debt position of close to US$10 million, so that might not exactly be a strong balance sheet

6) Does the company have room to grow?

In its latest first quarter results, Food Empire commented that the construction of a non-dairy creamer plant, a snack factory, and a beverage manufacturing facility in Malaysia, have been completed. Commercial production has started for the non-dairy creamer plant and the snack factory. Meanwhile, the beverage manufacturing facility is expected to begin delivering orders by the third quarter this year. Management thinks its snack factory will open up new growth opportunities in non-beverage businesses.

An instant coffee plant in Andhra Pradesh, India is also slated for completion by early 2015. Once completed, it will have a production capacity of 4,500 tons. The non-dairy creamer plant and the instant coffee plant will help the firm have greater control over its key commodity costs in manufacturing its instant beverage products.

The firm added that it will continue to pursue activities to build up its brand equity and strengthen its distribution networks. It is also on the lookout for merger and acquisition opportunities.

Foolish Bottom Line

In a final tally of the scores, Food Empire has done well on only two fronts: 1) It has low institutional ownership; and 2) it seems to have growth opportunities.

Although the company probably wouldn’t excite Peter Lynch, the fact that there are avenues for growth might suggest that the company could see better days ahead if and when the situation calms down in Russia and Ukraine. But that said, the political uncertainly is in fact one of the key risks investors have to take note of: Even though there are new factories coming on board, they may be left underutilised if the on-going Russia-Ukraine crisis creates a continued lack of demand.

Potential investors have to delve deeper into this major risk factor before putting their hard earned money into Food Empire.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.