IPO Undervalued? Analyzing the Market's Love for a Growing Café Chain

THE CONTEXT   • So, there’s this amazing surge in the stock price of a popular café chain in Johor and in various parts of Malaysia called Oriental Kopi. From 44 sen at IPO, it rocketed to as high as 98.5 sen. It settled at 86 sen recently for a PE ratio of about 40X. One may wonder whether the IPO underwriters underpriced the stock. Or is it just the market seeing an enormous growth potential for Oriental Kopi even in an industry that is notorious for its competition?  • Analysts consensus target price is 77 sen. UOB Kay Hian target is higher at 88 sen -- which is 100% higher than the IPO price (see report below). • In any case, the story is pretty interesting: a 4 year-old company with 20 outlets has won the hearts of many Singaporeans and Malaysians alike for its delicious and affordable fare.  AmInvestment Bank pointed out that the company has a "highly free cash flow generative business" due to its minimal working capital requirements and high return on equity. Its modular and scalable business model enables efficient expansion with a short payback period of 10-12 months. Dato' Chan is a substantial shareholder of Oriental Kopi. After completing his secondary school education in 1999, he began a sales career in mobile phones, later founding several businesses in telecommunications and retail. In 2018, he co-founded the "Black Whale" bubble tea chain and transitioned to focus on Oriental Kopi which he co-founded in 2020, leading its growth to 20 cafes across Malaysia and Singapore. He owns 57.53% of holding company United Gomax which owns 73.35% of Oriental Kopi. • Is Oriental Kopi's market cap of RM1.75 billion justified? For more on the company, see excerpts of UOB KH’s report (issued before IPO trading day) below.....

Excerpts from UOB Kay Hian report
Analyst: Phillip Wong

Oriental Kopi Holdings (KOPI MK)
Rising To The Top, One Pastry At A Time

INITIATE COVERAGE

 • Proof is in the coffee, tarts and more. Oriental Kopi’s fully-owned cafes emphasise quality and consistency, avoiding a franchise model to maintain control over products and services.

Learning from predecessors’ mediocre success with a franchise model, Oriental Kopi remains dedicated to high standards in a competitive market.

The brand stands out with its award-winning F&B offerings, including its signature coffee, egg tarts, and polo buns, which have earned various accolades.

A strong recipe creation team, led by Head Chef and shareholder, Ho Poh Chian, ensures menu innovation and consistent quality across all outlets.


• Hitting the sweet spot with customers. With an impressive average Google rating of 4.3 stars across its 20 outlets, Oriental Kopi enjoys widespread customer approval.

Its expansion is supported by menu standardisation, in-house tastings, and a focus on locallyinspired dishes.

The ongoing process to certify its stores halal should aid their aim for shariah compliance by May 25, and enhance their appeal to a broader demographic.

This strategic move, coupled with its focus on customer satisfaction, positions Oriental Kopi to expand its reach.

• Poised for tremendous growth off a low base, Oriental Kopi’s growth strategy is driven by its F&B cafe operations and FMCG segment.

The cafe segment, still in its infancy stage of its life-cycle, plans to open 12 additional outlets by FY25-26, bringing its total to 32.

Despite a seemingly low store count addition, it would represent a significant 44% and 23% growth (two-year CAGR: 33.3%) over FY25-26.

• Icing on the cake – FMCG growth. Meanwhile the FMCG segment will undergo a widening of distribution channels, including its own cafes, online platforms, and wholesalers.

Oriental Kopi targets to have five specialty retail stores that only sell its FMCG products by FY26, vs one at the moment.

Consequently, FMCG revenue share is projected to reach 19% by FY27 from 7% in FY22.

Full report here.