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Russia-Ukraine Crisis: Could This Tiny Singapore Stock Be Worth a Second Look?

We have a terrible crisis at hand. And that's the good news. Could this tiny, little-known Singapore stock be worth looking at now?

We might have a reincarnation of a terrible crisis at our hands.

And that’s the good news.

We talked about the Russian-Ukraine crisis over dinner last Saturday.

I said: “I’m not worried.”

Let me get to the point.

What’s Putin’s problem?

You see, after the cold war ended and Germany reunited in 1990. Many Europe countries started to form an military alliance called NATO (North Atlantic Treaty Organization).

There are 30 countries in NATO — 27 European countries, 2 North American countries and 1 Eurasian country.

Since 1997, more and more countries joined.

For the longest time, Russia tried to stop Ukraine from moving toward the NATO. This is because Ukraine shares the same borders between the European Union and Russia, and also as a former Soviet Republic, Ukraine has deep cultural ties with Russia.

That’s why when Ukrainians got rid of their “pro-Russian’ president in 2014, Russia got pissed off and annexed Crimea.

Now, Putin wants a “guarantee” Ukraine wouldn’t join NATO. Because once Ukraine joins, NATO, Putin thinks Ukraine could “turn around” and launch an attack together with the European alliance.

Geopolitical tensions too, will pass.

A quiet Singapore stock still making good money

And what’s worth looking at is a little-known Singapore company.

You might not know this: it’s a major consumer manufacturer in Russia and Ukraine. This company sells to over 50 countries — Russia and Ukraine are its two biggest markets. 

In fact, in 2020, Russia and Ukraine contributed S$100 million and S$67.8 million of revenues. That’s already 61% of total revenues. 

Not only that, today it has eight manufacturing plants in Malaysia, India, Vietnam, Russia and Ukraine pumping out consumer brands to its key markets.

Source: Food Empire 3Q2021 Results

Food Empire (SGX: F03) is a tiny S$330 million market cap company.

The company was listed in 2000. It started out as an electronics trading company, before turning into a consumer company. Food Empire was recognized as one of the “Most Valuable Singapore Brands” by IE Singapore.

Forbes Magazine even named Food Empire one of the “Best under a Billion” companies in Asia twice. Today, its key brands include MacCoffee, Cafe PHO, Slodoba, Klassno, Kracks and OrienBites. 

Its flagship coffee brand — MacCoffee — is consistently ranked the top “3-in-1” in Russia and Ukraine.

Source: Food Empire Annual Report 2020

Because of its huge business in Russia and Ukraine, Food Empire shares have fallen by 20% since the start of this year.

Source: ShareInvestor Webpro

But this is not the first time Food Empire shares have tanked because of geopolitical tensions.

Between 2013 and 2015, Food Empire shares plunged 70.7% from the peak in March 2013 — also because of the Russia-Ukraine stand off. The Russian Ruble, Ukrainian Hryvnia plunged, Russian stocks tanked.

Yet Food Empire’s products continued to sell strongly to their two biggest markets.

And the interesting thing was, after the Russian-Ukrainian crisis was over, Food Empire shares recovered 235% and later on, more than tripled its earnings.

Is this Singapore stock worth another look?

Russia is primarily a tea drinking culture. 

But over the years, their drinking habits have also included coffee. Even though coffee consumption is still lower than some European countries, there are more and more coffee shops and specialty coffee roasters all over Russia. 

And because the coffee culture is still underdeveloped, there’s huge potential for Food Empire and their coffee.

In its latest 3Q2021 results, Food Empire sold S$31.6 million of its products to Russia, another S$16.8 million to Ukraine. And the rest in Asia. That’s almost half of its revenues to Russia and another 20% to Ukraine. Food Empire’s gross profit margin over the last nine months was around 30%.

Gross profit margin measures the pricing power of a consumer product. Its revenues minus the cost of producing the products.

COVID pandemic has affected Food Empire because of supply chain disruptions. But once the world resumes its pre-pandemic normal, I think Food Empire can recover.

The thing is, no matter what’s going on in Russia, whether a war breaks out or not, people still need to eat and have their hot drinks. Actually, that led to Food Empire’s resilience during the last Russian-Ukraine crisis.

Over the last 10 years, Food Empire’s revenues have grew steadily from S$226 million to S$273 million. While net profits grew from S$15 million to S$27 million over the same period. Even during the previous Russia-Ukraine standoff in 2013, revenues and profits recovered almost immediately after the crisis was over.

Food Empire’s average return on equity (ROE) over the last five years is around 11%.

ROE measures how capital-efficient a business is. It’s how much profits shareholders get for every dollar invested into the business.

Not too bad. Not too bad.

A major Russian-Ukraine crisis may unfold again. But like what Warren Buffett says: “Be greedy when others are fearful.”

Shares are down since the start of this year. 

But Food Empire shares are still higher than it was since the last Russian-Ukraine Crisis in 2013. Food Empire business is rarely complex or complicated. It’s boring. This means you’d expect a steady growth in the business year after year.

If investors can overlook the short-term impact, this should be a long-term tailwind for this tiny, boring business.

Sometimes investing can be simple.

Willie Keng, CFA

Founder, Dividend Titan

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3 Comments
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Alvin
Alvin
7 months ago

What would be the support level for food empire then?

JM Chua
JM Chua
6 months ago

How doing see the sanctions on Russia. FEH will not get their money out of Russia in the short term.

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