Lessons Learnt from Food Empire

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I believe what led to the sharp fall in the share price of Food Empire was due to the ongoing political turmoil in Ukraine, which involved Russia, as well as its past two difficult quarters. Fears of military conflicts between the two countries led to the depreciation of the Rouble against the USD. I sold off my stake in Food Empire mainly because I was concerned that the depreciating Rouble against the USD would negatively affect profits, which have already been battered down by the company’s strategic push upstream. I had also learnt more about the industry while scuttlebutting with friends in Russia, who told me that Nescafe is very popular in the country – a trend that I found while researching more about Super Group – an instant coffee producer which has market leading positions in Southeast Asia. Here are a few lessons that I took away from this investment:

1. Understand more about the risks that each investment entails – To be frank, I focused more on company specific risks rather than macro risks, which could have an enormous impact on the company. Investing in emerging markets where political stability may not be a norm would require a greater margin of safety.

2. Knowing thyself  Throughout the previous China Minzhong crisis and this one, I have started to understand myself better. Being a lousy market timer, I need to invest in stocks which I am comfortable with holding for the next 10 years. As such, I am becoming more inclined to the notion of income investing as opposed to simply value investing for capital appreciation. Thus, I will be on the lookout for more dividend stocks to add to my portfolio.

3. Scuttlebutt, scuttlebutt, scuttlebutt! – Hearing information from people on the ground helps alot in understanding my investment better. It gives me information which I may not be able to find out just through the internet. In this case, speaking to my Russian friends gave me a better indication how Food Empire is doing as compared to its competitors.

Nevertheless, I still think Food Empire has a strong brand in its core markets and will continue to keep a lookout for it. The issue now is price. Currently selling at $0.40, the company is selling at 14.5 P/E and 1.05 P/B. I would require a greater margin of safety to entice me into entering again.

 

 

 

Food Empire Holdings

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Food Empire Holdings is basically a food manufacturing and branding company as its name indicates. It produces ready-to-make food products like instant coffee, teas, frozen food products, snacks and confectionery. Its key brand and best-seller is its MacCoffee 3-in-1 product. Its key markets include Russia, Ukraine, and Kazakhstan where they have market shares of 50%, 40% and 70% respectively. Its products are also exported to over 60 countries in Asia, Middle East, Eastern Europe and the US.

Financials
From 2009-2012, the Group’s revenue and profits have showed a steady increase. Its ROA and ROE as of end 2012 stands at 9.7% and 12.7%.
Competitive Advantage

MacCoffee                    Klassno              Kracks-Sour-Cream-Onion

FEM’s competitive advantage lies it its branding ability. In its core markets of Russia, Ukraine and Kazakhstan, its brand is widely considered as the market leader. In the case of Russia, the company has shown its resilience in staying put through the Russian financial crisis in 1998 and 2008 while many foreign enterprises left. It has built the MacCoffee brand in Russia for 20 years and aims to do the same- organic brand building in the markets it is entering. The brands built by the company were recently valued at US$174.8 million by brand consultants.

Growth
In 2013, the CEO highlighted in his speech that his first priority was to develop FEM’s business in Asia, Middle East and the African continent. Outside of its top three country markets of Russia, Ukraine and Kazakhstan, the company will be concentrating growth efforts in the emerging markets of Myanmar, Philippines, Malaysia, Vietnam, China and the Middle East. FEM will also explore new opportunities in some African countries.

The company has also made investments in upstream projects, like a non-dairy creamer plant and a potato chips plant in Iskandar, Johor; a packaging plant in Klang, and an instant coffee powder plant in India. This moves were made to help mitigate the risks of fluctuations in commodity prices. The company will not be utilising 100% of these plants, and most of the capacity will be for external sale. Hopefully, FEM will be able to lift its margins by going upstream and also its revenues, by producing ingredients for other companies.

Key Risks
1. Political Stability in its markets – As Food Empire’s business is centered on emerging economies, political instability might affect its business. Currently, there are riots and protests in Ukraine, which may affect the company’s sales figures (I am unable to find information whether FEM was affected by this).

2. Currency Risks – FEM took 4 years to get back to its 2008 revenues due to the impact of the currency exchange of the Russian Rouble and the USD. According to the chairman, prior to the 2008 global financial crisis, it was 23 roubles to a USD. At the peak of the crisis, it was 40 roubles to a USD.  In 2012, it was 30-33 roubles to a USD. FEM was impacted because its sales were in USD. As such, currency fluctuations in its different markets might affect the company’s performance going forward.

3. Legal battles with McDonalds on the use of brand name MacCoffee – In 2007, Food Empire lost its fight over the MacCoffee mark in Singapore. Should these legal issues be brought up in its target markets, it might pose a problem for Food Empire.

 

As of 18/3/14, I have divested my stake in Food Empire, due to the ongoing political crisis and the risk of currency devaluation, which I believe will significantly impact FEM’s profits. The company has seen earnings drop drastically in the last 2 quarters, as they undertake upstream projects. Furthermore, while researching more about the instant coffee industry, I realised that Nestle has been winning market share from many competitors in many emerging markets. A further talk with a Russian friend has proved it to be true. I sold off my stake at a cost of $0.425, which gave me a significant loss of -28.95%. I will be blogging more about this investment and the lessons learnt from it in the next post.