SINGAPORE (Jan 17): RHB is maintaining its “buy” call on Food Empire Holdings with a target price of $1.00.
The F&B group is the research house’s top pick for Singapore’s consumer sector this year.
This comes on the back of the group’s 22%-owned associate, Caffe Bene, filing for a court-led corporate rehabilitation process, due to excessive debts assumed prior to the investment made by the group
The rehabilitation process is yet to be approved by the court.
Empire Holdings bought into the Caffe Bene, a coffeehouse chain, in 1Q16 when it was loss-making, as an opportunistic investment into the downstream retail platform.
The group initially expected Caffe Bene to turn around in 2018 and saw opportunities in supplying its products there.
In a Tuesday report, analyst Juliana Cai says, “While Caffe Bene has progressively pared down some of its debt, it still holds a substantial amount.”
In addition, there were many legacy issues, which caused the turnaround to be slower than expected.
As at 9M17, Caffe Bene made a dent in Food Empire’s earnings by US$1.3 million ($1.7 million).
“We note that the underperformance of the former [Caffe Bene] has been a continual drag on the latter’s [Food Empire] results – and highlighted the potential risk of asset impairments in its 4Q17 results, if its performance failed to improve.”
The analyst reckons that the coffeehouse chain has resolved the bulk of its legacy issues, but 4Q was challenging for it as it was a seasonally weaker quarter.
“The tightness in working capital during the low season, exacerbated by the pullback of bank loans, made normal daily operations difficult for Caffe Bene,” says Cai.
Hence, Caffe Bene applied for the corporate rehabilitation process and if accepted by the court, would provide some relief from its creditors, allowing it to reorganise its business back to profitability.
The analyst thinks that this would being about an impairment of assets in the current FY results.
“Given that a court-led business organisation might occur over a fairly long period of time, we believe it would be most prudent for Food Empire to take this opportunity to kitchen-sink its entire Caffe Bene exposure, and have a clean slate for 2018’s earnings,” says Cai.
Moreover, the research house continues to be positive on Food Empire’s margin expansion from the appreciation of the Russian Ruble, as well as the improved profitability at its food ingredients segment.
As at 10.30am, shares in Food Empire are trading at 70 cents or 12.6 times FY18 earnings with a dividend yield of 1.4%.
