OldTown adds choice to F&B stocks

KUALA LUMPUR: New food and beverage (F&B) outlets are sprouting like mushrooms across new townships and shopping malls as restaurateurs rush to grab a slice of the growth in consumer spending. While there is ample choice for diners, there used to be limited options for investors on Bursa Malaysia looking for exposure to the F&B sector. Not anymore.

For a long time, the benchmark and probably only F&B stock worth looking at was KFC Holdings (M) Bhd. KFC not only served its world-famous secret recipe chicken, but also threw in the occasional colourful boardroom and shareholder tussles in as side dishes.

Over the last 18 months, we have seen two new IPOs for F&B stocks — Oversea Enterprise Bhd and Berjaya Food Bhd.

Soon, they will be joined by OldTown Bhd, a home-grown coffee outfit known for its “OldTown” café outlets and white coffee.

As OldTown heads for listing in mid-July, the question is how the company stacks up against its peers.

At an offer price of RM1.25 per share, it places OldTown’s historical price-to-earnings ratio (PER) at 12.9 times, which appears to be on the high side relative to other recently listed IPOs, although not to industry benchmark KFC Holdings (M) Bhd.

KFC, aside from being a well- known franchise, is cash-rich and currently trades at a historical PER of 19.2 times and a forward PER of 18.3 times. But analysts note it deserves a big premium over the rest for its global brand name.
OldTown Bhd, with its ubiquitous chain of OldTown White Coffee outlets, is heading for a listing on Bursa's Main Market and has already committed to paying out 50% of its gross earnings.

Last year, Oversea Enterprise Bhd listed on the ACE Market with an issue price of 23 sen, which at the time translated into a historical PER of 7.8 times. However, Oversea, which runs a chain of Chinese restaurants, did not manage to capture the imagination of investors and was last trading at 13.5 sen, 9.5 sen below its issue price. The highest the stock had closed at over the past 12 months was 20 sen. Part of it had to do with its poor financial performance.

The company went into the red in the quarter just after listing, and chalked up a net loss of RM324,000 on a revenue of RM62.74 million in FY Dec 2010. Oversea had slipped into the red following a decline in revenue from both its restaurant and manufacturing business.

In FY09, just before the IPO, the company had reported a net profit of RM5.2 million on the back of RM65.1 million in revenue.

More recently, Berjaya Food Bhd, which owns the chain of Kenny Rogers Roasters restaurants in Malaysia, was listed in March 2011 at an issue price of 51 sen. Based on its earnings per share (EPS) of 6.14 sen for FY April 2010, that implied a historical PER of 8.3 times.

Unlike Oversea, Berjaya Food has fared much better. Its share price was last traded at 88.5 sen, up a hefty 73.5% from its IPO price. And unlike Oversea, it fared better in FY11, with net profit of RM10.6 million — or 7.5 sen per share, 22% higher than FY10’s RM8.7 million. That places the stock at a historical PER of 11.8 times, lower than OldTown’s IPO valuation.

It would not be fair to do an apple-to-apple comparison of OldTown and Oversea, despite both being local brand names unlike KFC and Kenny Rogers’ more global presence. But there is no denying some of the similarities between the companies.

Oversea, which is known for its chain of Chinese restaurants, also manufactures baked goods for sale. OldTown has its ubiquitous chain of OldTown White Coffee cafés and makes its line of white coffee.

Both are also in the same overseas markets, namely Singapore and Indonesia. However, while OldTown’s business model is that of a franchise, similar to KFC, Oversea still manages its restaurant chain, resulting in a more limited reach.

Of OldTown’s outlets in Malaysia, at least half are franchised while the remaining outlets are either fully- or partly-owned by the company. Being in a franchised business offers some buffer for the company against the fluctuating fortunes of a restaurant, and gives it a stream of franchise fees.

Also, while Oversea opted to list on the ACE market, OldTown is heading straight for the Main Market, which could possibly explain the more expensive valuation.

Compared to another coffee chain — a global one — Starbucks Corp is trading at a historical PER of 27.2 times and a forward PER of 26.5 times. However, Starbucks has been hit by the economic downturn and over expansion, which has made investors slightly wary of the stock.

OldTown has been working on establishing its brand name, which bodes well for the chain in the long run. According to analysts, its model seems to echo that of KFC, which could mean that the company could eventually end up cash-rich.

OldTown has committed to paying out 50% of its gross earnings. According to ECM Libra, this translates into an estimated FY11 dividend per share of 5.3 sen, or a 4.2% yield.

Beyond the cafes, the company is also investing some RM52 million into a plant in Ipoh to manufacture instant beverages and coffee powder. The new plant would help to increase the company’s production capacity by 500%, and drive its next stage of growth. It would also offer a more consistent earnings stream in the long run.

OldTown certainly seems to have high aspirations, but with the current state of the market, it still remains to be seen whether investors will see the value in its business.