SINGAPORE (Mar 20): Tan Wang Cheow, founder and executive chairman of Food Empire Holdings, was originally an exporter of electronics such as computers and fax machines to Russia and some parts of Eastern Europe, before he ventured into the F&B business.

But Tan soon found it difficult to keep his electronics business as an ongoing business as technology was evolving so rapidly while margins were declining as fast. That was when he decided to try to sell and share to the same consumers something he has been passionate about — coffee.

“In 1992, we attempted to sell [coffee in Russia] and even secured a big contract there. Then, in 1994, we introduced MacCoffee in Russia. That was the start of the journey for us in the F&B sector,” says Tan, in an interview with The Edge Singapore, who prefers his coffee black so he can enjoy its body and full flavours.

Up until the mid-1990s when Tan introduced coffee — more specifically three-in-one coffee mix — to the market, Russians mostly drank tea. But they quickly took to coffee once they had their first caffeine kick and got used to the convenience of making a hot drink in extreme cold weather.

Tan explained that in the early days, Food Empire did a lot of sampling and promotional activities to educate people about instant coffee, and at the same time gathered feedback from the ground. “In time to come, many people got to know about us,” he adds.

Today, Food Empire commands over 50% of the three-in-one coffee mix market share in Russia. Other products it sells and manufactures include frozen convenience foods, confectionery and snacks. It also has a non-dairy creamer plant which produces the ingredients for Food Empire’s own products as well as for other food manufacturers.

Steady growth

For the past two years, Food Empire has seen consistent growth in full-year earnings, thanks to steady sales, coupled with the rationalisation of underperforming markets.

In FY2019 ended Dec 31, 2019, Food Empire reported earnings of US$26.1 million ($36.4 million), 44.3% higher than US$18.1 million in FY2018. This came on the back of a 1.5% y-o-y increase in revenue to US$288.6 million from US$284.3 million last year.

For 4QFY2019, the company reported earnings of $5 million, up 83.6% y-o-y. Revenue was up 4.7% to US$73.3 million. The company plans to pay a final and special dividend of 1 cent per share in total.

While revenue was higher from markets such as Ukraine, Kazakhstan and other parts of the former Soviet Union as well as South Asia, the company’s sales dropped in Russia and Southeast Asia.

Tan says it was not because the Russians, who make up Food Empire’s largest market now, no longer enjoy coffee. Rather, the ruble had weakened against the US dollar, the company’s reporting currency, resulting in a 0.6% y-o-y drop to US$112.6 million.

In Southeast Asia, sales dropped by 1.8% y-o-y to US$78.3 million, largely due to the rationalisation of underperforming markets, specifically Myanmar. Growth in Vietnam, now Food Empire’s second largest market, helped offset the decline.

Given the Vietnamese prefer their own very brand of coffee, Tan says it took a lot of perseverance and experimentation with different products for about six years before the company was able to grow its revenue across the US$50-million mark.

Still, Food Empire has not had much luck in Myanmar despite it having a large population of young people eager to try new products. The group entered the Myanmar market in 2013 but had to scale down its operations in 2019 before shutting down its operations recently.

Tan says this was due to the depreciation of the Burmese Kyat over the years as well as ongoing political sanctions against the country. Also, he has not been able to raise the selling price, adding a lot of pressure on the group’s margins.

However, Tan is open to making another attempt down the road. “We have decided that temporarily, we may have to retreat for the time being, and wait for better conditions before we move back again. We will look at the possibility of maybe doing some trading and taking a step backwards, instead of having people on the ground which is very costly,” explains Tan.

At the close on March 18, shares in Food Empire closed at 46.5 cents. At this level, the company is trading at 6.63 times historical earnings and has a market value of $249.2 million.

Interestingly, although Food Empire is a Singapore-based public company, it is not all that concerned about the domestic market. Instead of fighting for shelf space at supermarket chains such as NTUC and Sheng Shiong, Food Empire only has an online store that sells grounded coffee capsules and the accompanying coffee capsule machine under the Tazzanera brand.

When asked about the discrepancy, Tan says it is easier to carve a niche market in such a large country as Russia compared to Singapore which has a small market but plenty of competitors. Therefore, Tan is still comfortable with the markets it has invested in and will continue to grow market share in them through branding and product development, and expansion of its sales and distribution networks.

On the manufacturing side, Tan says near-term expansion plans include the building of two additional non-dairy creamer towers, whose construction is expected to be completed over the next 24 months. The company also has an instant freeze-dried coffee plant in India, which is expected to start production in the second half this year.

Stock upgrade

While Singapore-listed consumer stocks have taken a hit from the Covid-19 outbreak, Tan does not expect the crisis to have a significant impact on Food Empire. “Our business is quite localised in terms of operations. Our key markets, such as Russia, Ukraine and Vietnam, are self-contained in operations and we have our own production plants there to service the local marketplace. Sales and distribution are also done locally. Thus, we are not extensively affected,” says Tan.

In fact, Tan says it may be a good thing because more people may choose to stay home and drink coffee at home instead of going out to the cafes. “Even if the Covid-19 situation gets more severe, I’m sure that consumption at home will always be there and may increase further as more people are encouraged to stay at home. And that could help raise the profile of our products,” adds Tan.

RHB Research analyst Juliana Cai agrees that Food Empire’s sales will be relatively resilient against the Covid-19 epidemic, as its exposure to China is small. “Neither does it depend on China for raw material supplies,” she says. Cai has a “buy” call on Food Empire with a target price of 88 cents in its Feb 26 report, up from her earlier target of 83 cents.

Additionally, Cai believes that the group is able to surpass its FY2020 revenue target of US$300 million. “Management believes that the ruble bottomed out at the end of last year. This would put Food Empire’s largest market, Russia, in good stead to deliver a stronger performance this year,” she adds. The new coffee plant in India will also help create another revenue stream, she notes.

UOB Kay Hian’s Joohijit Kaur has an even higher target price of 92 cents on the stock — up from 89 cents previously. In her Feb 26 report, she praises the company for its higher total overall FY2019 dividend payout of two cents — up from 0.68 cent for FY2018, saying this is an indication of stronger confidence for FY2020. The company’s valuation of 10 times FY2020 estimated earnings — lower than peers’ average of 21 times — is also attractive.

In addition, the company’s Vietnam operations has room for further margin improvements. “Vietnam that is still operating at lower margins compared to its core markets and should benefit from better scale as the group grows its operations in the country,” she notes.