ZUS Coffee funding deal brews interest

ZUS Coffee’s latest funding deal piques interest on a few levels.

For one, it cements the point that coffee chain valuations have reached super-sized valuations.

Second, it tells you that starting a business selling coffee may make you a lot of money.

Another notable element of this deal is that it entails mostly existing shares, which means the bulk of the funding is going into the hands of the existing shareholders rather than into the company.

Are the new funders, which include the Retirement Fund Inc (KWAP), getting the best of the deal and what returns could they get in an increasingly competitive retail coffee market?

On the valuation front, news on ZUS’ latest funding round suggests that the business was valued at a massive RM1bil.

(This year, Indonesia’s Kopi Kenangan’s latest funding round valued the company at more than US$1bil!).

Last month, a consortium comprising KV Asia Capital Pte Ltd, KWAP and Indonesia’s Kapal Api Group said they will be investing RM250mil into ZUS Coffee’s operator – Zuspresso (M) Sdn Bhd.

While details were not announced, media reports have suggested that the deal entails RM50mil for new shares and the balance RM200mil for existing shares.

This means, existing shareholders are cashing out partially, walking away with a cool RM200mil. The single largest shareholder of Zuspresso is Janica Lao, daughter of Filipino billionaire Frank Lao with a 35.48% stake, acquired just last March.

ZUS Coffee founder and chief executive officer Ian Chua owns 21.27% and there are 15 other shareholders in Zuspresso, including chief operating officer Venon Tian Jerng Hui (0.49%), head barista Terence Ho You Gio (0.72%), and angel investor Tan Swee Yeong (10.87%). It isn’t clear who among them is selling their shares but it surely will be a windfall.

The million-dollar question is, what was the valuation of ZUS Coffee last March when the Laos invested in the company? Of course this is not public information but based on channel checks, our sources tell us that the figure was around RM250mil then.

If so, then it is a massive jump to RM1bil, one-and-a-half years later. To be fair, ZUS Coffee’s sales have shot up. Company search data shows that sales for its financial year ended June 30, 2021 (FY21) was only RM16.7mil and that grew to RM87mil in FY22 and RM204mil by FY23.

The company had also been profitable all three years, earning a profit after tax of RM443,000 in FY21, RM3.8mil in FY22 and growing that to RM10mil by FY23. It should be noted that these are probably only the earnings from Malaysia, excluding its Philippine operations.

The earnings for its FY24 is also not known. It must be showing the continued impressive growth to get the private equity investors excited.

That said, the company can still be considered to be in its early stages of growth and poised to come up against some serious competition. Wouldn’t it have been better if the RM200mil was used to bolster the company’s finances?

That said, it is normal for different investors to come into companies at different stages, each investor having their own risk tolerance and focus areas.

On the positive side, ZUS Coffee has been on a roll, growing its revenues. Its success factors include using a lot of technology – its app-based ordering and delivery system is said to enhance customer convenience.

ZUS Coffee sells specialty coffee at affordable prices, which some reckon to be at around a 30% discount to incumbent Starbucks. Since its inception in 2019, ZUS Coffee has expanded to operate around 600 stores across Malaysia and the Philippines, with plans to enter new markets like Singapore and Brunei by the end of 2024.

There is a loyal following, the result of good coffee and marketing strategies, including Instagram-worthy cafe designs.

As one industry observer explains, “They seem to have a competitive advantage in a crowded space”. But investing is all about the numbers. When buying into a RM1bil valued company, the hope is that its value doubles, triples, quadruples or even more.

The big question is how much more can Zus Coffee be worth in a few years?

The plan is for ZUS Coffee to get listed on the local exchange, which would prove a nice exit for the recent investors.

ZUS will need to grow its bottomline figures aggressively in order to give it a decent price earnings (PE) multiple valuation to make it palatable.

That may not be too much of a challenge going by the recent listing of 99 Speed Mart Retail Holdings Bhd, which listed at a demanding historical PE of 35 times, only to see its shares climb even higher, with the market now ascribing it a PE of more than 50 times earnings. This is an indication that the market does seem to like retail plays.

The newly secured investment will grow ZUS Coffee’s business as well as support moves into new verticals like fast-moving consumer goods.

The company will enter Singapore and Brunei by year-end, adding on to its 50 overseas stores in the Philippines.

In Malaysia, ZUS Coffee operated 550 stores as at August 2024 and is continuing to expand aggressively.

That said, competition is stiff. New retail beverage chains are coming in fast, adding to the existing ones.

Some focus on tea but that could also eat into the market share of coffee shops and they are coming from China.

Mixue and Chagee, for example, attract a growing crowd of customers.

Finally, it is widely speculated US-listed Chinese coffee-house chain Luckin Coffee Inc is poised to make its debut in Malaysia.

One thing about China entrants is that they tend to be steadfastly focused on market share at the expense of profits.

Just look at how local players were decimated in the last mile delivery space in Malaysia by companies from China.