OldTown released an announcement, confirming news reports of an explosion that occurred at its central food processing centre at Subang Jaya, Selangor. The incident occurred in early last Thursday, 21 Sep 2017. Based on our initial estimates, the financial impact is largely insignificant.
According to news reports, the explosion was due to a gas leak, with 8 employees admitted to the hospital. However, management and the respective authorities are still in the midst of ascertaining the cause of the explosion.
The building structure is OldTown’s central kitchen, related to its F&B segment. It is OldTown’s only central kitchen in Malaysia. Recall, OldTown had previously rationalised two of its central kitchens to its existing location in Nov 2016. The closure of its Ipoh-based central kitchen was due to cost-saving measures.
We gather from management that the explosion was not structure-wide but limited to a specific production room. The production room produces OldTown’s proprietary paste and sauces. In the meantime, operations have been temporarily ceased pending an investigation by the necessary authorities.
The company will now outsource its food inputs as part of its contingency plan.
Based on our initial estimates, the operational impact to earnings is insignificant. Assuming 10% higher food input cost being outsourced for a month, it translates to a -0.8% impact to FY18 earnings. Its F&B segmental earnings contribute c:30% of total earnings. We temporarily exclude the financial impact arising from structural damage seeing possible insurance entitlement.
We are cognizant of OldTown enduring the occasional operational hiccup. It suffered an FMCG production glitch and a supply chain disruption over the past 2 years. However unlike previously, this incident is a greater detriment to reputation than to its financial standing. We opine there may have been a knee-jerk reaction as news trickled in last Thursday, with OldTown underperforming the broad market by 3.2%.
We ascribe investors to accumulate on any potential weakness based maintain our BUY recommendation and FV of RM3.20. Our FV is based on 17.0x CY18F P/E, which is a 20% discount to simple average PE of its FMCG peers. We continue to like OldTown for its export-driven growth and market leader as #1 white coffee brand in its core markets.
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