Oriental Kopi tastes swift success

ANYONE who has visited a mall with an Oriental Kopi outlet will be familiar with the long lines to get a table.

Remarkable for a business that only started in December 2020, and in very challenging conditions too, as all will remember the intermittent lockdowns during the Covid-19 pandemic.

Oriental Kopi has come a long way since opening its first outlet in Johor Jaya.

The in-store sales of its house brand packaged foods expanded quickly to include spreads, pastries, instant noodles as well as seasonal food items such as mooncakes.

The second outlet opened in MidValley South Key mall in Johor Baru less than six months after the first. The business then expanded swiftly to the Klang Valley, Penang and Sarawak.

Now, under Oriental Kopi Holdings Bhd, the co-founders are taking the company public by issuing 418.1 million shares at 44 sen each through an initial public offering (IPO) on Bursa Malaysia’s ACE Market.

The market capitalisation upon listing and based on the IPO price as well as the enlarged share capital is RM880mil.

The listing is scheduled for later this month. According to CGS International Research (CGSI Research), the IPO price values the stock at financial year ended Dec 31, 2024 (FY24) price-to-earnings (P/E) of 20.4 times.

The only other business with a similar profile offering food and beverage (F&B) products, albeit only coffee, is the now delisted Old Town Bhd.

The stock had a P/E of 13 times at IPO, with its packaged white coffee becoming eventually the main contributor to revenue.

Old Town was listed in July 2011 and delisted in April 2018. At its peak, Old Town’s P/E ratio was over 26 times. Currently, the average P/E ratio for F&B-related companies is around 13 times.

Oriental Kopi’s IPO after barely four years is to leverage on Malaysians’ propensity to spend on comfort food. The long lines clearly show that the office crowd, weekend crowd and tourists are back.

The IPO will raise RM184mil to build a headquarters, central kitchen, warehouse and crucially, to open 13 cafes and four speciality retail stores in 2025 and 2026.

Currently, there are 20 cafes in Malaysia and one in Singapore operated under a joint venture (JV) as well as one speciality retail store offering its house brand packaged food products.

An investor points out that the company does have a “moat”, in the sense that it can replicate the quality of its F&B products on a bigger scale going from the IPO plans.

“Some companies cannot replicate the same taste, so the company’s scalability is a big plus,” he says, referring to its plan to make café operations more efficient through the setting up of a central kitchen that can also ensure quality. The individual cafes will continue to prepare the F&B at the final stage.

The company made a loss in its first full year of operations in FY21 but has since been profitable, with net profit and revenue doubling in FY24 from FY23.

But consumers can be fickle and taste is subjective. The investor adds that successful F&B chains must have the ability to scale and maintain taste consistency.

“It is yet to be determined whether the central kitchen can do that,” he points out. At 20 times P/E, he feels the stock is fully valued unless the business can grow 200%.

“Maybe the company is doing it because it has big expansion plans and the IPO involves only new shares. But upside may not be as high,” he says.

Given that the business is easily replicated, another investor feels that the valuation is “punchy” but is amazed at its growth over the past four years. He too feels that taste will be a critical factor in whether the company’s growth is sustainable.

For now, the long lines could be because of the novelty, which may wear off. The cafes contributed over 90% of revenue in FY24, with an average of RM15.3mil each.

This is a 34% increase from FY23’s RM11.5mil.

CGSI Research points out that from FY21 to FY24, the company posted a compound average growth rate of 280% supported by café operations, which grew 275%, and the distribution of house brand packaged foods, which grew 505%, aided by additional distribution channels and higher margin product mix as well as revision of selling prices for certain products.

The co-founders are well aware of the taste factor to sustain success and had shared at a media briefing following the launch of the prospectus that there is a strict standard operating procedure to ensure the taste is consistent. The company does not want more than 40 to 50 cafes to ensure taste is not compromised.

In a country full of kopitiams, many will have their view on what makes a good kopi-o brew or whether the nasi lemak and char koay teow are up to mark. Oriental Kopi plans to expand in South-East Asia, which comes with its own risks given different consumer tastes and trends.

The Singapore JV with Paradise Group Holdings Ltd, in which Oriental Kopi has a 30% stake, may give an idea on where the company may expand, said Mercury Securities, as Paradise Group has restaurants in Indonesia, Hong Kong and China.