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Oriental Food Industries Bhd, established in 1978, is involved in the production of snacks, wafers, potato chips and cakes. It is well known for its cheese-flavoured corn snack — “Super Ring” — which accounts for 7% to 8% of its total sales. Furthermore, its superior food processing technology allows its cakes (for example, Layer Cake) to have a shelf life of one year without preservatives.

Potato chips and cakes enjoy better gross margins at around 30% to 35%, while the gross margins of snacks and wafers are lower at 25%.

The company sells about 45% of its products locally while the other 55% is exported. Some 70% of local sales are through wholesalers while the rest are sold through grocery stores, convenience stores and key accounts like Tesco and Jaya Jusco. Oriental Food exports to over 40 countries, with the largest being Thailand, Vietnam and Indonesia. Raw materials account for 80% of total costs, which include flour, potatoes, corn, sugar, eggs and palm oil.

Its potato chip production line is operating at full capacity at 300kg per hour. The company plans to add a new line with a capacity of 550kg per hour as early as 1H2010. So far, it has secured orders in hand to utilise 30% of the new capacity and hopes to utilise 50% of the new capacity by 2011. Its new wafer plant which is operating at 40% capacity is expected to boost capacity utilisation to 60% when new products such as wafers coated with caramel plus rice crisps and chocolates are introduced.

Revenue was lower for the three months ended September 2009 at RM28.7 million (-13.8% y-o-y) as export sales were hit by the global financial crisis. However, pretax profit (before profit from land sale) for the three months ended September 2009 improved to RM6.2 million from RM5.8 million previously on the back of lower raw material and selling and distribution costs. For the year ending March 2011, the company expects higher sales due to higher sales of potato chips arising from the new plant and higher wafer sales when the new chocolate and rice crisps wafer products are introduced.

As the company is expected to reduce its capital expenditure in the next financial year, it is expected to be in a position to pay higher dividends (FY2010E: 10 sen), implying a 7% dividend yield. Its annualised FY2010E PER is low at 6.5 times. Comparable food companies like Apollo and Mamee Double Decker are also trading at low PERs of 8.4 times and 4 times respectively, based on annualised EPS for the current financial year. Listed food-based companies in Malaysia suffer from low liquidity. The challenge for food companies in general is to sustain growth through new products and new markets, otherwise, sales and earnings are prone to stagnation as organic growth is slow.

Choong Khuat Hock is head of stock research and a partner at Kumpulan Sentiasa Cemerlang Sdn Bhd, a fund management company. KSC may own shares in some of the companies covered by the writer.

This article appeared in Capital page of The Edge Malaysia, Issue 785, Dec 14-20, 2009

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