• Maintain BUY, new SGD1.23 TP from SGD1.36, 27% upside with c.5% FY25F yield. We continue to like Food Empire for its strong balance sheet, cash generation ability, market share traction, valuation, and growth led by capacity expansion. We cut FY25F and FY26F earnings by 2% each, on higher depreciation due to the construction of new plants. Our new TP is based on 9x FY25F P/E – this lower multiple accounts for revenue and margin headwinds including price challenges in Russia and elevated coffee prices.

• Starts new coffee manufacturing facility investment in Vietnam. FEH has announced that it will be investing approximately USD80m (including working capital) in a new freeze-dried soluble coffee manufacturing facility in Binh Dinh province, Central Vietnam. The group already has an instant beverage production facility in Vietnam, and this will be its second factory and first ingredients production facility there. It can tap on Vietnam as a leading producer of Robusta coffee beans for supply, to produce freeze-dried soluble coffee. The new facility will help to increase the production of freeze- dried soluble coffee, in addition to its existing manufacturing facility in India. This will help FEH to diversify and grow its ingredients business to become a key player in spray-dried and freeze-dried soluble coffee. Construction is expected to start in 1Q25, and scheduled to be completed in early 2028. The group recently raised USD40m of redeemable exchangeable notes from Ikhlas Capital, and this will come in handy to help fund this Vietnam expansion, in our view.

• Reduce FY25F and FY26F earnings by 2% each. This new facility is a long- term investment where production will commence only in 2028, but there is no revenue benefit before that, except for increased capex and depreciation. We impute higher capex for FY25F and FY26F, and increase depreciation expense assumptions marginally due to the construction of the new plants. As such, our FY25-26F earnings are now lower by 2% for each year.

• Now less upbeat on TP due to current headwinds. We are positive on FEH’s long-term growth, supported by higher production in Malaysia, Kazakhstan, and Vietnam. However, we are now less positive on elevated coffee prices, the interest expense on notes issued to Ikhlas Capital and its conversion price of SGD1.09, as well as the short-term challenges of raising product prices in Russia. This has led us to reduce our forward P/E to 9x from 10x, ie near mean levels. Our new TP, consequently, drops slightly to SGD1.23.

• 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 - 17 Sep 2024