Oriental Food seeks growth via biscuit venture

This article first appeared in The Edge Financial Daily, on October 16, 2017.
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KUALA LUMPUR: Oriental Food Industries Holdings Bhd, a home-grown snack food and confectionery maker which carries brands like Jacker, Rota and Super Ring, is venturing into biscuit production as part of its long-term growth plan.

Group executive director Datuk Son Tong Leong said the group is in the midst of finalising the formula for the biscuit, with the launch of its first range of biscuit products targeted for next month.

“We originally planned to launch our biscuit products this month, but we wanted to make a bigger impact by launching the entire series on the market. We still have another few products to finalise and we will be launching them next month,” he said in an interview with The Edge Financial Daily at his Melaka office.

The 47-year-old Tong Leong is the son of Oriental Food’s founder and managing director Datuk Seri Son Chen Chuan, whose family holds a controlling 42.02% stake in the group.

Tong Leong said Oriental Food’s new venture is a natural progression in the continued growth of the group.

“When it comes to snack food, we’ve made good progress and are well known in the market. But we were thinking how we could move to the next level. We believe diversifying into a new segment will help grow our footprint in the food business,” he explained.

Tong Leong conceded that it has become difficult for the group to achieve double-digit growth with its existing snack food and confectionery products.

“We can easily add machines to our existing four production lines for our potato products. Adding one [machine] could boost our revenue probably another 5% to 10%. But in order to have more growth, we have to venture into another [new] segment,” he added.

The group’s revenue is entirely derived from the snack food and confectionery segment, which stood at RM256.1 million in the financial year ended March 31, 2017 (FY17). Revenue increased 4.6% year-on-year from RM244.9 million in FY16.

However, its net profit fell 28.3% to RM18.25 million in FY17 from RM25.46 million in FY16 due to higher raw material and labour costs — its first decline in net profit since FY13.

Tong Leong also said Oriental Food is in an expansionary mode.

In 2014, it acquired a 10-acre (4.05ha) piece of leasehold industrial land adjacent to its existing headquarters in Ayer Keroh, Melaka for RM11 million and is in the midst of building a factory and warehouse on the site. “This land is sufficient to meet our expansion needs over the next five to eight years,” said Tong Leong.

The new factory will house two production lines catered for its new biscuit and cookie business and is set to commence production in the first quarter of 2018.

Tong Leong said the group has spent RM43.9 million on land acquisition and building the new production facilities, but he expects the total capital expenditure for this expansion to amount to RM50 million.

In the first quarter ended June 30, 2017 (1QFY18), the group’s net profit fell 20.5% to RM3.27 million from RM4.11 million a year ago, while revenue increased 5.3% to RM66.72 million from RM63.34 million.

“For this financial year (FY18), it is very difficult for us to estimate our bottom line due to the rising cost of raw materials and labour. This year, we see a rise in sugar prices, as well as packaging cost due to higher paper prices. And the price of paper is expected to rise by another 8% in the near future as some China paper mills had stopped production on environmental grounds, resulting in supply shortage,” said Tong Leong.

Tong Leong added that Oriental Food will try to pass as much of the cost increases to consumers although it’s hard to do so as its competitors absorb some margin loss.

“Although we absorb some margin loss, all of us are still making money,” he said, adding that raw materials account for 60% of the group’s production cost.

Nevertheless, Tong Leong said he expects the group’s revenue to continue its growth momentum of 3% to 4% in FY18 given the resilient demand in the export market. Export sales accounted for 63.5% of the group’s revenue in FY17.

Today, Oriental Food employs about 900 people, of which about 750 are involved in production.

“Earlier this year, we suffered from a shortage of manpower. However, we have had foreign workers coming in since July. In May or June this year, we received approval from the authorities to hire 500 Bangladesh workers for two years,” he said.

“We replenished the manpower shortfall of about 200 people during the first half of this year. After December, we will hire more workers ... another 100 to 200 people will be recruited to service the additional capacity,” he added.

Despite a challenging year, Tong Leong said as a business owner of a manufacturing business, he is unfazed by the cyclical patterns of the industry unlike short-term investors.

“Our family is the major shareholder of the group. So, no matter whether the share price goes up or down, we won’t be trading them. We are still running the business and we are looking at growth over the next five to 10 years,” he added.

Oriental Food shares closed two sen or 1.29% lower at RM1.53 last Friday, with a market capitalisation of RM367.2 million. Year to date, its share price has risen 11.7% from RM1.37 on Dec 31, 2016.