Could This Company Be An Opportunity to Play the Current Russian Crisis?

MACCOFFEE

 

Incorporated as Future Enterprises Pte Ltd back in the early 1980s, Mr Tan Wang Cheow and his partners entered Russia to distribute personal computers and PC peripherals. However, while pursuing the PC business, the Group saw potential in the F&B industry in these countries due to its large population base. Mr Tan hence decided to distribute instant beverages and thus, Food Empire Holdings (SGX: F03) was born.

 

Company Background

Today, the Group has grown from a revenue base of US$59 million in FY2000 (fiscal year ends Dec) to US$263 million in FY2013, a 12% CAGR. This is mainly driven by its instant beverages including Klassno, Petrovkaya Sloboda, FesAroma, Melosa, Hillway, Hyson Teas and of course its flagship product, the MacCoffee 3-in-1 which has been a huge hit in Russia. Brand Finance Consultancy (Singapore) Pte Ltd has valued MacCoffee at US$139.7 million. Including other brands, Food Empire Holdings have been assigned an aggregate value of US$174.8 million as at end-Oct 2013.  The Group’s instant beverages has accounted for 94% of total revenue. Russia continued to be its key market in which it accounted for 58% of total revenue.

 

Steering through the Global Financial Crisis…

Despite being a relatively small-sized company with a market capitalization of US$124 million, Food Empire Holdings have survived 2 major financial crisis during FY1997-98 and FY2008-09. No one was spared during the Global Financial Crisis. In FY2009, Food Empire’s total revenue dipped 39.3% to US$134.8 million as consumer confidence remained weak amidst an economic slowdown. EBITDA margin shrank from 11.5% in FY2008 to 4% in FY2009. However, management was quick to respond to the oncoming calamity. Food Empire tightened its credit terms made to its debtors, reducing its trade receivables from US$69.7 million to US$36.5 million during FY2008-FY2009. The Group has also reduced purchases of inventories and increased its cash holdings from US$15.5 million to US$61.3 million over the same period. With an increased operating cash flow mainly from working capital, Food Empire took the opportunity to reduce its borrowings with total debt/equity declined from 13.6% to 4.71%.

 

Renewed Sovereign Risk…

Food Empire might once again have to face a potential crisis, i.e. crude oil prices has recently a major price correction from >US$100/barrel to below US$60/barrel. This could adversely impact Russia given the country’s strong reliance on oil revenues.

 

Value in Action

The Group has grown rapidly and stayed competitive despite being in a markets with a huge political uncertainty and volatile inflation rate.

 

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All views and opinions articulated in the article were expressed in Willie’s personal capacity and do not in any way represent those of his employer and other related entities. Willie does not own any shares in the companies mentioned above.

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