31 May 2019
(Stocks Discussion) SGX: Food Empire Holdings Limited (SGX: F03)?
Discuss anything about Food Empire Holdings Limited SGX: F03 share price, dividends, yield, ratios, fundamentals, technical analysis and if you would buy or sell this stock on the SGX Singapore markets. Do take note that the answers given by our members are just your opinions, so please do your own due diligence before making an investment in Food Empire Holdings Limited SGX: F03
Source: Food Empire
Food Empire is a global branding and manufacturing company in the food and beverage sector. Its products include instant beverage products, frozen convenience food, confectionery and snack food.
Although the company is called food empire, most of their revenue come from their beverage products. And alghoughFood Empire’s products are sold to over 50 countries, most of the revenue comes from Russia and Eastern Europe.
As management had cited, they have wanted to improve efficiency by streamlining processes as well as cutting out operations. Becasue of such moves, I believe the operating margin for the firm had improved.
The financials also show that quite a good amount of growth occured in IndoChina, and the firm will continue to grow and expand over there. The rest of the markets have grown as well, leading to an increase in revenue. Much of this growth probably comes from the growth in such emerging markets.
However, growth had also been affected by the devaluation of the Easter European countries due to the fluctuation in oil prices.
This foregin exchange loss had led to growth being affected last year.
I expect the firm to have positive revenue growth over the next few years as they are situated in growing emerging markets. However, as the years go by, I conservatively reduce revenue growth. I assume that by 2024, the firm stops growing, but that it can defend its market share and mantain its revenues in perpetuity. I believe that the firm has this ability to maintain such revenues because of its strong branding and top of the mind awareness for consumers. I also believe that the firm can mature and grow to fight off new entrants and at the very least maintain revenues.
The last few years for Food Empire has been an increase and then a decrease in profitability. The reason for the dip in profitability most likely occured due to the heavy advertising expense for sponsoring events in Russia last year, which is a one-off marketing cost.
To be on the safe side however, I project that operating margins will continue to fall due to the expansion in Asia, which have a gestation period. After a few years, I allow the operating margins to rise again. The decrease in profitability will probably be matched by improved costs from the restructuring that the firm is doing. However, to play safe, I allow the margin to stabalise at 7.5%. This is lower than the industry average for Emerging Markets comparables. Overall, this is a pretty conservative estimate in my opinion.
Over the last few years, the firm has become more efficient in their use of resources. This is probably due to the streamlining and restructuring initiatives that they under took. This is higher than the industry average. Hence, I chose to maintain the Sales/Capital over a few years and decrease this ratio to the industry average. This might probably be the case because capital might become more inefficient over time. This is also more in line with the Sales/Capital raito in previous years.
Cost of Capital
The risk-free rate that I employ here is the US implied risk-free rate, and the market risk premium. I do this because the financials I used are all in USD.
I added country specific premiums to the cost of equity due to the high exposure to emerging markets. The highest country specific premium was actually for Ukraine at more than 3%.
Discounting the cashflows at the cost of capital leaves me with a target price of $0.40 USD. When converted to SGD, that leaves us with $0.55. This is 3.5 cents higher than the current trading price of $0.515, representing an upside of 6%.
I believe that I have been quite conservative in my use of estimates here. I estimate revenue growth at lower values than risk-free rates for the next few years. I ensured that the assumptions on operating margins and capital efficiency are not above average, and are at the very at the average or below it.
The firm also has a higher cost of capital than their industry peers, and I did not adjust leverage to lower this cost of capital in the future.
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