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Oriental Kopi Holdings Bhd (KOPI) - Enormous Growth in Every Sip

MalaccaSecurities
Publish date: Wed, 08 Jan 2025, 12:10 PM
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  • Oriental Kopi Holdings Bhd operates the well-known "Kedai Kopitiam Oriental Kopi" chain of cafés, with 20 outlets primarily in Klang Valley and Johor.
  • Moving forward, we project a 3-year earnings CAGR of 28.0%, with core PAT expected to reach RM65.9m, RM84.4m, and RM90.4m over the next three years, underpinned by strengthening its presence by setting up new cafés both domestically and internationally, which we believe will have a spillover effect on its packaged foods segments.
  • We derive a fair value of RM0.75 (an upside of 70.5% compared to the IPO price of RM0.44) for Oriental Holdings Bhd. This fair value is derived by pegging a P/E ratio of 20x to the mid-FY26f EPS of 3.76 sen. Although a P/E ratio of 20x is a discount compared to the average P/E ratio of 31.9x and the forward P/E ratio of 25.7x for the Food Products sector, we believe it is justified given KOPI's smaller market capitalisation.

Investment Highlights

Exponential growth. KOPI's revenue has grown exponentially over the past four financial years, at RM5.0-277.3m; primarily attributed from the consistent expansion of its 'Kedai Kopitiam Oriental Kopi' outlets. The company has significantly expanded its footprint, primarily in the Klang Valley and Johor, bringing its outlet count to 20 as of the LPD, since starting its operations in 2020.

Stable and improved margins. KOPI has successfully improved and stabilized its PAT margins over the years; the latter due to (i) rental cost optimisation through the Gross Turnover Rent model, enabling KOPI to manage its rent costs efficiently, and (ii) the high volume of raw materials purchased from suppliers, ensuring better purchasing costs despite fluctuations in commodity prices.

Café expansion to support higher customer volume. KOPI plans to use its IPO proceeds to expand its café chain operations domestically by opening new cafés in various states, thereby increasing the total number of cafés. The new cafés will be located as follows: (i) 5 in the Klang Valley, (ii) 1 in Negeri Sembilan, (iii) 2 in Penang, (iv) 2 in Johor, (v) 1 in Malacca, (vi) 1 in Pahang, and (vii) 2 in East Malaysia.

Expanding its footprint to neighbouring countries, starting with Singapore. The company aims to establish more joint venture partnerships with local firms, like Paradise Oriental; allowing the company to enter new markets while minimizing CapEx risks, as partnering with established local operations reduces the need for significant capital upfront.

New central kitchen and warehouse to support expansion plan. In tandem with its outlet expansion, KOPI will also build a new central kitchen and warehouse to meet the increasing workload and better serve its outlets. The company's current plan involves relocating its existing warehouse at TPP3 to the new operational facility. This new facility is expected to be completed by Q4 2026, and anticipate improving operational efficiency, resulting in cost savings and higher margins.

Wide distribution network. Besides its expansion café-chain operation plan, KOPI has established a myriad distribution network for its packaged products domestically, which includes (i) in-store sales, (ii) its 24 existing resellers, (iii) e-commerce platforms. Beside in-store sales, its 24 existing resellers which includes wholesalers and retailers from supermarkets, hypermarkets, minimarkets, and health and beauty stores, whom resell KOPI's products to their respective customers.

Short payback period. Given the relatively low CapEx of RM2.5-2.8m required to open a new outlet, Kedai Kopitiam Oriental Kopi's new locations typically achieve a payback period of just 10-12 months on average. Although the company is still in its early stages, its cafés that have been operating for at least 12 months over two consecutive years have managed to achieve a healthy Same Cafés Sales Growth (SCSG) especially for older outlets in Johor.

Company Background

A fast-growing FMCG retailer. Oriental Kopi Holdings Bhd operates the well-known "Kedai Kopitiam Oriental Kopi" chain of cafés, with 20 outlets primarily in Klang Valley and Johor. Its merchandising strategy is to offer customers a diverse Malaysian menu that includes mainly local cuisine, such as hot meals, snacks, pastries, desserts, cold drinks, and hot/cold coffee and tea. Additionally, the company is involved in the distribution and retail of its in-house brands through in-store sales, resellers, and e- commerce.

Financials

Financial overview. KOPI's revenue surged from RM5.0m in FY21 to RM277.3m in FY24, achieving a CAGR of 280.9% over the 4-year period. This significant growth was driven by an increase in its F&B services and consumer-branded packaged foods segments, supported by a higher volume of customers amid the growing number of cafés and stronger brand awareness for KOPI's packaged foods.

While the global fluctuations in coffee prices impacting raw material costs, KOPI maintained a healthy net profit margins of over 15% for the past two years, with substantial growth in its net profit from RM20.0m in FY23 to RM43.1m in FY24. This growth can be attributed to (i) efficient cost management, (ii) strong pricing power, and while benefiting from the growing customer volumes domestically in both of its primary revenue segments.

Earnings forecasts. Moving forward, we project a 3-year earnings CAGR of 28.0%, with core PAT expected to reach RM65.9m, RM84.4m, and RM90.4m over the next three years. This growth is largely supported by the group's plans to strengthen its presence both domestically and internationally by setting up new cafés, which we believe will have a spillover effect on its consumer-branded packaged foods segments. Additionally, we anticipate the group able to maintain healthy margins above the 15% despite the growing need in CapEx expanding its business, supported by its efficient rent model for outlets, optimized purchasing prices, and new facilities that will further enhance KOPI's operating efficiency.

Valuations

We derive a fair value of RM0.75 (an upside of 70.5% compared to the IPO price of RM0.44) for Oriental Holdings Bhd. This fair value is derived by pegging a P/E ratio of 20x to the mid-FY26f EPS of 3.76 sen. Although a P/E ratio of 20x is a discount compared to the average P/E ratio of 31.9x and the forward P/E ratio of 25.7x for the Food Products sector, we believe it is justified given KOPI's smaller market capitalisation.

Investment Risk

Reliant on third-party suppliers. Any disruptions in the supply of ready-to-cook and ready-to-mix/blend food for KOPI's outlets, and ready-to-eat packaged foods from third- party suppliers will adversely affect its business operations and financial performance in the future.

Changes in consumer behaviour, trends, brand preferences. Failure to align its offerings with consumer requirements and expectations could potentially harm KOPI's reputation and impact the results of its operations and financial performance.

Shortage of labour. In the event of a shortfall in the labour supply for KOPI's operations, and inability to maintain a stable workforce by replacing or hiring new workers promptly would adversely affect its business operations and financial performance.

Dependent on key senior management. Discontinuation of service of the key senior management may disrupt key decision making within KOPI's business operations.

Source: PublicInvest Research - 8 Jan 2025

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