Food Empire made a few announcements over the past week with regards to Cafe Bene and its ingredient business. Below are the links to the announcements.
12 Jan: Corporate Rehabilitation of Caffe Bene
17 Jan: Expansion of Manufacturing Facility in India
19 Jan: Profit Guidance
Good News
The company is capitalising on its success of its ingredient business. Given that the last tranche of its payment comes in 2020, I assume that the impact of the expansion will only be felt from 2020 onwards.
Not So Good News
The 22% owned Caff Bene is dragging the performance of the group. Based on an RHB report, it has caused a dent in its 2017Q3 profit by USD1.3 mil. From the latest profit guidance, its exposure to Caffe Bene is around USD10 mil, which will result in a loss for 2017Q4.
Impact
The group has done well for the first three quarters. Its net profit for the first 9 months had exceeded 2016. Based on past two years results, quarter 4 has always been a weak quarter. Assuming its Q4 net profit from its core business to be about 50% of that of Q3, 2017 profit will be around USD21 mil, 40% higher than 2016’s USD15 mil.
If the company writes off its USD10 mil loan to Caffe Bene, then its profit for the year will drop to USD 11mil, about a 30% drop from 2016. Not nice but going forward if the court approved the rehabilitation process for Cafe Bene, it bodes well for 2018 results.
On the balance sheet side, with the loan of USD30 mil for its expansion plan, it will probably be in net debt and management might choose not to give any dividend for this year. At most, I think it would maintain last year’s payout.
So short term, there would be some selling pressure. On the other hand, if I look at a 3 to 5 years time, the group should do well.
What will I do?
It really depends on how the market reacts to the latest news. If the drop on Monday is not too steep, I would probably pare down my stake to lock in some profit. On the other hand, if it drops by at least 20%, I might consider buying more during the week.
Towards Financial Independence 
Sold half my holdings at $0.66. Will wait for results announcement before taking further action.
Hi, the price drop was not as deep as I thought. I would most likely stay vested till FY results announcement. If this is a one time off and core biz remains strong, I am prepared to ride this out.
Yup, the price is holding pretty ok. I do believe it is a one-off event and I still like the company pretty much. I am just unsure how the market will react to it, especially when the company announces its results in February.
Hence, my half-half approach. If market reacts negatively to it, I will take the opportunity to scoop some at a lower price. On the other hand, if it is a non-event, I have my remaining shares.
And if the company continues to do well, then I might buy at a higher price in the future.