Financial impact on OldTown minimal after explosion at central kitchen

KUALA LUMPUR: AmInvestment Research expects OldTown to sustain only minimal financial impact from an explosion at its central food processing centre in Subang Jaya, Selangor last Thursday.

The research house said on Monday the building was 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 November 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,” it said. 

AmInvestment Research said the production room produces OldTown’s proprietary paste and sauces. 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,” it said. 

AmInvestment Research was cognizant of OldTown enduring the occasional operational hiccup. It suffered a fast moving consumer goods (FMCG) production glitch and a supply chain disruption over the past two 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 17.0 times 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 the No. 1 white coffee brand in its core markets,” said the research house.