• Maintain BUY, with lower SGD1.52 TP from SGD1.75, 55% upside and c.6% FY25F yield. We continue to like Food Empire for its strong balance sheet, cash generation ability, market share traction, valuation, and share buyback initiative. We lower our earnings by 4-9% to factor FEH’s proposed notes issue to Ikhlas Capital and slightly lower margins due to sustained higher coffee prices. Our TP based on 10x blended FY24-25F P/E is consequently reduced, offset by the impact of share buyback.

• Strategic partnership with Ikhlas Capital on the cards. FEH announced that it had entered into a non-binding term sheet with Ikhlas Capital Singapore on 21 June to establish a strategic partnership and the proposed issuance of up to USD40m of redeemable exchangeable note to Ikhlas Capital, an ASEAN private equity fund manager headquartered in Singapore focused on growth, transformation, and cross border value creation, and founded by Nazir Razak, Kenny Kim, Gita Wirjawan, and Cesar Purisima. The key purpose of the strategic partnership is to work with Ikhlas Capital to develop and expand its business in South East Asia and South Asia. Ikhlas Capital will inject USD40m into a special purpose vehicle wholly owned by FEH that will hold or possess the option to hold a portfolio of business operations, including FEH’s South East Asian and South Asian businesses. The notes will carry 5.5% annual interest and have a tenor of 5 years. Ikhlas Capital will have the non- obligatory right to convert the notes into new shares at SGD1.09 per share. The proceeds will help to fund capex and merger and acquisition activities in South East Asia and South Asia. FEH has also announced in a media clarification statement that it is currently conducting feasibility studies and exploratory discussions with Vietnam authorities to construct a new instant coffee factory. The proposed funding may be in line with the planned development of this new instant coffee plant. There will be further dilution if Ikhlas Capital converts the notes into shares eventually.

• FY24-26F earnings reduced by 4-9%. The notes are a slight negative on earnings as there will be c.USD2.2m of annual interest costs. This works out to c.3% decline in net profit for FY25-26F and 1.5% decline for FY24F assuming half-year impact. We have also imputed slightly lower margins to account for recent sustained high coffee prices. We consequently reduce our FY24-26F earnings by 4-9%, along with our P/E multiple from 11x to 10x.

• Capacity to drive growth. We expect Malaysia’s new non-dairy creamer plant to reach full utilisation in a few years, with new snack production capacity planned to contribute from 2025. Its first coffee mix production facility in Kazakhstan is also expected to be completed by end-2025.

• Downside risks to our forecasts include a disruption in operations due to the Russia-Ukraine conflict, and the negative effect of a change in the value of the RUB and other CIS countries’ currencies. As FEH’s ESG score is 3.0 (country median: 3.1), we apply a 2% discount to its intrinsic value to derive our TP.

Source: RHB Research - 4 Jul 2024