Fire outbreak at Oldtown’s operations insignificant, analysts say

KUCHING: Analysts expect the recent fire outbreak which occurred at Oldtown Bhd’s (Oldtown) central food processing centre is unlikely to have significant impact on the group’s operations.

In a filing on Bursa Malaysia, the group’s board of directors said the cause of the incident was due to an explosion occurred at the central food processing centre, belonging to wholly- owned subsidiary Emperor’s Kitchen Sdn Bhd ( EK).

Oldtown noted that the food processing operation in the EK processing plant has temporarily ceased and is expected to recommence via auxiliary means in the shortest time possible in order to mitigate any supply disruption to food and beverage (F& B) chain outlets.

“There is no impact to the coffee and beverage manufacturing and warehousing facilities,” the group said.

According to AllianceDBS Research Sdn Bhd (AllianceDBS Research), the stock endured a high volume selling pressure last Thursday, after the news broke out.

The research firm noted that the stock dropped by six per cent to a low of RM2.54 before recovering to close at RM2.60, which was down 3.4 per cent compared to the trading day before.

The research firm believed that the sell down was mainly due to concerns with regards to a potential temporary shutdown of Oldtown’s fast-moving consumer goods (FMCG) and food and beverage (F& B) operations. There were also concerns on the large financial damage incurred as a result of the fire incident.

“We believe that the fears are largely unfounded,” it said.

AllianceDBs Research highlighted that Oldtown’s manufacturing plant for instant coffee powder is allocated in Ipoh.

As such, the fire incident has no impact on the group’s FMCG operations, which the research firm estimated contributes about 80 per cent to group pretax profit in financial year 2018 (FY18).

On Oldtown’s F& B segment, AllianceDBS Research noted that the food processing operations in Subang Jaya has ceased temporarily to facilitate the fire and police departments as well as Oldtown’s management to investigate and ascertain the cause of the fire incident.

“Nonetheless, we understand that most of its café outlets have on average about two weeks of food inventory,” the research firm said. “As such, its F& B business should not be disrupted by the temporary closure of its food processing operations.”

Besides that, the research firm noted that Oldtown has contingency plans in place where the group will outsource the food processing function to a designated third party if the plant is closed for longer than expected.

The cost arising from the fire incident was also expected by AllianceDBS Research to not be significant.

“We gather that the fire incident only affected its production floor, while its operating units and administration office are not affected.

“Management believes that the damages are adequately insured pending the insurance company’s assessment,” the research firm said.

Based on the available information, AllianceDBS Research believed that the fire incident will not have a significant impact on Oldtown’s operations and neither will it materially affect the group’s near term earnings prospects.

As such, the research firm kept its earnings forecasts for Oldtown. Based on its initial estimates, AmInvestment Bank Bhd (AmInvestment Bank) also deemed that the operational impact to Oldtown’s earnings is insignificant.

“Assuming 10 per cent higher food input cost being outsourced for a month, it translates to a - 0.8 per cent impact to FY18 earnings.

“Its F& B segmental earnings contribute circa 30 per cent of total earnings,” the research firm said.

The research firm temporarily excluded the financial impact arising from structural damage seeing possible insurance entitlement.