• Food Empire (SGX:F03) has entered into an agreement to sell its industrial office at Harrison Road to a subsidiary of Lian Beng Group (SGX:L03) for S$49.25m. We believe this will be positive for Food Empire as its current office is underutilised and the sale will help to reduce debt, shore up its balance sheet while boosting its cash position and record a sizable one-off gain of S$20.54m.

Realising Value for Shareholders

• As no production is done in Singapore, Food Empire's office is mainly use as a head office, while the majority of the floor space is rented out. With rising interest rates, sale of this non-core asset will help Food Empire to unlock value by having a one-off gain of about S$20.54m. This will also help to reduce debt on its balance sheet by S$20.7m, which was tagged to the property’s loan.
• All in, Food Empire's net tangible assets (NTA) will increase from S$0.405 to S$0.431 per share after the transaction.
• We believe management will have better use of the sales proceeds to further grow the business, and may also resume its share buyback programme.

Demand Remains Strong Despite Ongoing Conflict

• Demand from its Russia, Ukraine and Kazakhstan (all comprising a single segment), as well as Commonwealth of Independent States (CIS) markets remains firm, with revenue only declining 5.5% and 5.8% y-o-y. This was partly due to a refocus of marketing efforts by management to increase its attention on the South Asia and other markets as a result of the Russia-Ukraine conflict.
• That said, we believe Food Empire’s business will continue to be resilient in its core markets – the demand for instant mix coffee remains sturdy, even with the ongoing war.
• In fact, it gives Food Empire an advantage, as foreign competitors are leaving such markets – which would benefit the players that stay. These include Food Empire, which has the largest share of these markets.

Food Empire Is Trading at Oversold Valuation

• We think Food Empire’s 1Q22 results should quash any doubts over the strength and diversification of its business. We expect it to continue doing well, despite the Russia-Ukraine war – with a recovery in margins being imminent. This, in turn, should be due to several initiatives undertaken previously, like raising prices to pass on the increase in freight and raw material costs. This asset sale of S$49.25m will also boost its balance sheet and cash position.
• Reiterate BUY call on Food Empire with S$0.95 target price, pegged to a 13x FY22F P/E, 83% upside and ~4% yield.

ESG

• Using our in-house proprietary methodology, we derive an ESG score of 3.0, which is on par with the country median. As a result, we apply a 0% discount or premium to our target price for Food Empire.

Source: RHB Invest Research - 5 Jul 2022