OldTown ... Oct12

The move by its cash flushed to raise over rm60 million through placement of new shares is raising concerns.

The private placement has attracted mixed views. Some are wondering why the company is turning to cap market to raise funds when it has a net cash of rm79 million and gross borrowing of rm14.2 million.

With its strong balance sheet, the company could easily raise much cheaper capital via bank borrowings.

Foreign shareholding in the company has risen to 19.7% stake from Feb 2012 till Sept 2012. In Aug 2012, OldTown's largest shareholder - Old Town Intl Sdn Bhd sold 10 million shares or a 3% stake to a few intl funds including foreign funds for an average price of rm2.06.

Old Town Intl is controlled by group MD Lee Siew Heng, Chin and Tan. In 2012 alone, the company disposed of 29.76 million shares or 9% equity interest, reducing its stake to 50.1% stake post IPO.

The issue of new shares will dilute earnings for existing shareholders. But that the funds raised will be ploughed back into the company for its capex and will increase profitability.

The group stated specially what it plans to do with the funds raised from the private placement. RM42.4 million will be allocated for capex for business expansion and the remaining rm18.17 million will be used for working capital.

However, the funds are likely to be invested in the group's F&B arm, which operates the 189 outlets of its coffeehouse chain OldTown White Coffee.

The group's F&B operations contribute 61% of revenue and 56% of net profit, with the remainder coming from the fast moving consumer goods arm that produces and distributes the group's instant coffee mix and instant milk tea.

The group plans to open 202 outlets by the end of 2012.

One segment that OldTown will aim to break into is the Malay segment, which currently (Sept 2012) makes up about 15% of OldTown's customers. It expects to be fully halal certified by end of 2012. The full halal certification is likely to be followed by an aggressive marketing campaign to attract more Muslim customers.

OldTown is looking to expand into high rental areas that have high footfall volumes by introducing a kiosk model.

Market observers have reservations about the group's F&B expansion overseas. The group has opened three outlets in China, eight in Singapore and four in Indonesia.
The F&B business needs to hit a critical mass before it becomes profitable and this time, especially in a foreign market which remains a risk.