3. RISK FACTORS 3. RISK FACTORS
In evaluating an investment in the Offer Shares, prospective investors should carefully consider all the information contained in this Prospectus including but not limited to the following general and specific risk factors. RISKS RELATING TO THE GROUP’S BUSINESS AND OPERATIONS (a) Terms of the MDA The Group does not own the KRR franchise and brand but has been granted the right by RAPM pursuant to the MDA to use the KRR brandname. As such the Group’s operations in Malaysia are highly dependent on the terms of the MDA with RAPM pursuant to which the Group had secured an exclusive franchise (with effect from February 2008) through BRoasters for its operations of KRR restaurants in Malaysia for an initial term of twenty-five (25) years from 1 January 2004. The MDA may be extended for a further twenty-five (25) years subject to certain terms and conditions. Pursuant to the MDA, although RAPM is not entitled to unilaterally terminate the MDA without cause, it may terminate the MDA under, amongst others, any of the following circumstances:(i) BRoasters fails to open a minimum of twenty five (25) restaurants or an averc:lge of one (1) restaurant per year during the initial twenty five (25) years term;
(ii) BRoasters fails to maintain the high standards of quality and service of restaurants it operates or to comply with all mandatory specifications, standard and operating procedures relating to the operation of restaurants (“System Standards”);
(iii) BRoasters fails to diligently and continuously monitor compliance with the System Standards by all restaurants and to furnish assistance to correct deficiencies in operation; (iv) BRoasters carries out any business or advertising practice which may be injurious to the business of RAPM or BRoasters and the goodwill associated with the trademarks, service marks and trade dress, of KRR and the restaurants; and
(v) BRoasters fails to secure and maintain in force in its name all required licenses, permits, and certificates necessary for the performance of its obligations under the MDA.
In the event that the MDA is terminated, the Group will not be able to continue its operations under the KRR brand name. Nevertheless, the Group has been using its best endeavours to ensure compliance with the terms of the MDA and the Group will seek immediate remedial actions to rectify or address any non-compliance in the MDA that may arise. (b) Independent Franchisees’ Operations May Impact the Group As at the LPD, there are thirteen (13) Independent Franchisees-owned restaurants in Malaysia. Whilst RAPM supervises the operations of the Independent Franchiseesowned restaurants, they are independent operators and have a reasonable amount of flexibility in running their operations, including the hiring of restaurant personnel. In view thereof, the Group has no control over the operations of the Independent Franchisees-owned restaurants. 3. RISK FACTORS Independent Franchisees may not successfully operate restaurants in a manner consistent with the Group’s standards and requirements. Such event, if occurs, may impact the reputation of the Group as customers visiting KRR restaurants in Malaysia may not be able to differentiate restaurants owned by the Group and those managed by the Independent Franchisees. As a mitigating factor, RAPM has in place strict standards and requirements which are consistent with the Group’s standards and requirements and occasionally conducts routine visits on the Independent Franchisees. (c) Availability, Quality and Price Fluctuations of Food Ingredients The Group’s chain of restaurants is highly dependent on the consistent supply of food ingredients that meet its quality requirements. The supply of food ingredients may be affected by external factors such as the outbreak of diseases, the occurrence of natural disasters (e.g. floods, landslides etc) or other disruption on a significant scale. Fluctuations in the supply of food ingredients will affect the market price of these food ingredients. A significant increase in the market prices of food ingredients will have an adverse effect on the Group’s profit margins and financial results should the Group be unable to pass on such increase to its customers. The Group procures all its food ingredients from third party suppliers. Any prolonged disruptions in the supply of food ingredients and/or that the food ingredients do not satisfy the stringent quality requirements as required by the Group, will have an impact on the overall business operations. Under such unlikely/rare circumstances, the Group will source for alternative suppliers locally and/or overseas to ensure the smooth running of its business operations and to provide high quality products to its customers. Being in the food services industry, the Group is also dependent on the prompt delivery and quality transportation of raw material. Disruptions such as adverse weather conditions, natural disasters and labour strikes could lead to delayed or lost deliveries to the Group’s restaurants which may result in the loss of revenue. There may also be instances where the conditions of fresh, chilled or frozen food products, being perishable goods, may deteriorate due to delivery delays, malfunctioning of refrigeration facilities or poor handling during transportation. This may result in a failure on the Group to provide quality food and services to customers, thereby damaging the Group’s reputation. Nevertheless, as mentioned in Section 5.6 of this Prospectus, the Group mitigates such factors by not being overly dependent on a single supplier and as such remains flexible to source its raw material from other suppliers should there be any delays in delivery. For the past five (5) years, the Group has not encountered any interruption in supply or quality issues in relation to its food ingredients. (d) Food Safety Standards Food contamination and deterioration are risks inherent to all food service providers. Given the nature of raw material used in the food production processes, in particular the contaminable and perishable nature, there exist the possibility of contamination and/or deterioration in raw material and food products during the production process. Any contamination or deterioration in raw material used or products sold by the Group may result in the raw material and products being unsafe for production and consumption respectively. 19
3. RISK FACTORS This may lead to delays in production or delivery of the Group’s products to its customers, loss in revenue, increase in associated costs of production and/or payment of compensation to customers for delays, which in turn may materially and adversely affect the Group’s reputation, business and financial performance. As a mitigating factor, the Group has in place a contingency system whereby the nearby KRR restaurant(s) will be mobilised to assist the affected restaurant should such situation arises. For the past five (5) years, the Group has not encountered any contamination or deterioration of its raw material or food product which has caused a disruption in the operations of any of its KRR restaurant. (e) Public Liability Insurance Coverage The Group currently has in place a public liability insurance of at least RM1,OOO,OOO for each restaurant which covers amongst others, bodily and personal injury, death and property damage caused by or occurring in connection with the conduct of the Group’s business. Being in the restaurants industry, the Group faces an inherent risk of food contamination and product liability claims. The restaurants’ customers may file complaints and/or claims against the Group pertaining to the quality of food products served. Any such complaints and/or claims made, regardless of their nature and validity, may affect the reputation and the overall business of the Group. Additional costs may also be incurred in placating any customers or in engaging legal services to defend the Group’s reputation. Depending on the quantum involved, in the event the insurance coverage is inadequate to address the aforementioned costs, the Group may need to divert and/or raise sufficient resources, internally and/or externally, to address such shortfall. This may adversely affect the financial position and operational results of the Group. Notwithstanding the above, the management believes that the Group has sufficient public liability insurance in place to cover all necessary claims as and when such claims arise. (f) Rental Fluctuations In view that all the Group’s restaurants are operated on rented properties, the Group has significant exposure to the retail rental market. For each of the FYE 2006 to FYE 2010 and the FPE 31 August 2009 and FPE 31 August 2010, the Group’s rental expenses represent between 50% to 56% of the total administrative expenses in the respective years/period. As r~ntal expenses represent a significant portion of the total operating expenses of the Group, the Group’s profitability may be adversely affected by any substantial increase in the rental expenses of the restaurant premises. Most of the Group’s tenancy agreements are for an initial period of three (3) years and contain an option to further extend for another two (2) terms of three (3) years each. Upon the expiry of the tenancy of a restaurant, the landlord will have the right to review and alter the terms and conditions of the tenancy agreement. Prior to the expiration of the tenancy agreement, the Group will negotiate with the landlord on the terms and conditions for the extension of the tenancy period with the landlord. However, there is no assurance that the tenancy agreement will be renewed or extended.
3. RISK FACTORS (g) Dependence on the KRR Product Offerings The Group’s performance is highly dependent on its single product offering, namely the product offerings of the KRR franchise, which is known for its rotisserie roasted chicken. Any material adverse changes to the market acceptance of the KRR brand and/or the change in consumers’ preference to its product offerings may materially and adversely affect the Group’s business and profitability. Nevertheless, the Group believes that such risk is mitigated with an experienced management team that has been with the Group for many years to develop the KRR brand in Malaysia. In addition, the Group has also taken and will continue to take appropriate measures which include introducing new and/or alternative menu items in its KRR restaurants such as meat/seafood products to diversify its product range, where necessary. (h) Uncertainties Associated with the Expansion of the Group’s Business As part of its business strategy, the Group intends to expand its business by opening new restaurants and/or venture into other related investment opportunities (such as other food and beverages related businesses) in Malaysia. Participation in new investment ventures involves various risks and may be affected by factors such as location of the new restaurants, approvals, licences and permits from local authorities and the availability of staff and skilled personnel. There is no assurance that the operational performance of those new restaurants would satisfy the Group’s expectations. In the event that any of the Group’s new restaurants perform below expectations, the overall operational and financial results of the Group may be affected. As a mitigating factor, the Group has in place an experienced and qualified senior management team which understands the Group’s restaurant business well and will continuously assess and evaluate the changing demands of the consumers before embarking on any further expansion plans for the Group. (i) Dependence of Directors and Key Personnel The Group’s current and future performance is very much dependent on the continued efforts and abilities of its Directors and senior management, some of whom have been with the Group for a considerable period of time. Any unforeseen loss of services of any of these individuals without suitable and timely replacements may temporarily disrupt or affect the Group’s ability to maintain or improve its performance. The Group’s future success and sustainability also depend on its ability to attract and retain qualified personnel. The Group currently enjoys a cordial relationship with its employees and all members of its senior management team have been in the employment of the Group for more than three (3) years. Additionally, the Group has in place an ESOS and has reserved a portion of the Offer Shares for employees via the Pink Form Shares Allocation to align the interests of its employees with the Group.
3. RISK FACTORS U> Rules, Regulations and Controls The Group is principally involved in the retail food and beverages business. To avoid any disruption in its business operations, the Group has been using its best endeavours to ensure strict compliance with the relevant laws, regulations and conditions that are enforced and/or imposed and that the relevant licences, certificates of fitness and permits are obtained and renewed on a timely basis. There is however no assurance that the introduction of new laws or other future regulatory developments will not have a material adverse effect on the business operations of the Group. Generally, any inability to comply with all regulations and/or conditions or changes in applicable regulations and requirements may have a negative impact on its businesses. There is also no assurance that the existing licences and permits issued will not be subject to the imposition of further conditions or restrictions by the relevant authorities from time to time or upon renewal, which may materially affect the business operations of the Group. (k) Breakout of Fire, Energy Crisis and Other Emergency Crisis The Group’s restaurants are susceptible to various risks such as breakout of fire, energy crisis or other natural calamities, which may cause significant losses or damage to its goods and restaurant premises, thus disrupting and affecting its business operations. The Group believes that it has adequate safety and fire-fighting equipment installed at its restaurants to ensure that the risk of fire is minimised. It has in place a system of educating its employees on fire safety measures and precautions as well as disaster recovery plan. In addition, the Group’s restaurants are adequately insured against losses arising from fire. However, notwithstanding the measures taken, there is no assurance that any of the abovementioned crises may not cause interruptions in the Group’s operations in the event of occurrence. 3.2 RISKS RELATING TO THE INDUSTRY IN WHICH THE GROUP OPERATES (a) Intense Competition The restaurant industry in Malaysia is intensely competitive and the Group competes with many well-established food service companies on the basis of price, service, ambience, location and food quality. The Group’s competitors include a large and diverse group of restaurant chains and individual restaurants that range from independent local operators to well-capitalized national and international restaurant companies. Being in the mid-casual dining category of restaurants, the Group’s closest competitors include, amongst others, Pizza Hut, Sushi King, The Chicken Rice Shop, Domino’s, RasaMas and Nando’s. As its competitors expand their operations, including through acquisitions or otherwise, competition is expected to intensify. The management believes that competition from the Group’s competitors is to a certain extent mitigated by the Group leveraging on its existing strengths and advantages to defend and to increase its market position. Notwithstanding the above, although the Group has been consistently seeking, adopting and introducing new initiatives/products to remain competitive, there is no assurance that competition from existing and/or potential competitors will not have a material adverse effect on the Group’s performance.
3. RISK FACTORS (b) Inability to Anticipate Changes in Consumer Preferences The Group’s continued success is dependent to a large extent, on its ability to anticipate and develop recipes that appeal to the changing tastes, dietary habits and preferences of customers. Should the Group be unable to anticipate and identify new consumer trends and develop/introduce new products accordingly, the demand for its food products may be affected which will then have an impact on the Group’s operating results. Additionally, the Group may incur significant costs relating to the development and marketing of new food products, or improving or altering existing recipes in response to what the Group perceive to be a consumer preference or demand. Such development or marketing efforts may not necessarily result in the level of market acceptance, volume of sales or profitability as anticipated by the Group. (c) Outbreak of Diseases Any outbreak of diseases or widespread contamination in any raw material used by the Group in its production may have an adverse impact on the business. In view that the Group’s restaurants are mainly located in high traffic volume places, any outbreak of transmittable diseases will reduce the traffic at such places. Such occurrences may lead to a loss in consumer confidence and/or reduce the overall demand for the Group’s products. The outbreak of Severe Acute Respiratory Syndrome (more commonly known as “SARS”), the Avian influenza (more commonly known as Bird Flu) and Influenza A (more commonly known as “H’I N1 “) had an adverse effect on the Group’s revenue and financial performance in the past. There can be no assurance that such outbreaks may not occur again in the future. The Group has taken and will continue to take appropriate measures which include introducing new and/or alternative menu items such as meat/seafood products and taking all necessary preventive measures to minimise the effects of such outbreak on the Group’s operations. (d) Changes in Political, Economic and Regulatory Conditions Changes in political, economic and regulatory conditions in Malaysia and elsewhere could materially and adversely affect the financial and business prospects of the Group. The political, economic and regulatory uncertainties include, but are not limited to, changes in political leadership, changes in laws and regulations, war, economic downturn, changes in rates of interest, methods of taxation and currency exchange rules, and financial crises. (e) Limitation of Strategic Locations In general, all established players in the food service industry, including BFood Group, constantly identify strategic locations to set up their restaurants. Apart from the quality of service and product offerings, identification of such strategic locations, which include places with high customer traffic flow such as shopping malls, is also imperative for food industry players to attract patrons. 3. RISK FACTORS However, there is no assurance that the Group may be able to continuously identify, secure and/or ensure favourable. terms and conditions for the tenancy to be entered into at such locations that are deemed strategic for its new KRR restaurants. Nevertheless, the management of BFood believes that Malaysia’s increase in urban population which contributed to a rise in the number of shopping malls developing in many parts of the country coupled with the expected continued growth in the Malaysian population and economy will provide the Group with continuous opportunities to identify new strategic locations which include but are not limited to new shopping malls. 3.3 RISKS RELATING TO INVESTMENT IN BFOOD SHARES (a) No Prior Market for the Shares and an Active Market for the Shares May Not Develop Prior to this Offer For Sale, there has been no public market for the Shares. There can be no assurance that an active and liquid market for the Shares will develop and continue to develop subsequent to its Listing or, if developed, that such a market is sustained. The Offer Price has been determined after taking into consideration various factors as stated in Section 2.8 of this Prospectus. There is no assurance that the market price may not decline below the Offer Price. The Group believes that a number of factors could cause the Company’s share price to fluctuate, including but not limited to, sales of substantial amounts of the Shares in the public market, announcements of developments relating to the Group’s business, fluctuations in the Group’s operating results, general industry conditions or the performance of the global economy. (b) Ownership and Control by Existing Shareholder As disclosed in Section 7.1.1 of this Prospectus, BGroup, as the Promoter and substantial shareholder of the Company will have an interest in approximately 74.65% of the issued and paid-up share capital of the Company upon Listing. As a result, BGroup and/or its holding company will have voting control over the Group and as such, will likely influence the outcome of certain matters requiring the vote of the Group’s shareholders, unless it is required that they abstain from voting either by law and/or by the relevant authorities. .Nevertheless, the Group has appointed two (2) Independent Directors to ensure that any future transactions involving related parties are entered into on arms-length terms which are not detrimental to the Group, so as to facilitate good corporate governance whilst promoting greater corporate transparency. (c) Possible Funding Requirement for Future Growth The Group may require additional funds in the future to finance the expansion of new developments relating to the Group’s existing operations and/or new acquisitions which could not be predicted at this juncture. Under such circumstances, secondary issue(s) of securities after the Listing may be necessary to raise the required capital to develop these growth opportunities.
3. RISK FACTORS Should the Group then fail to utilise the new equity to generate a commensurate increase in earnings, the Group’s EPS will be diluted, and this could lead to a possible decline in the Company’s Share price. Any additional debt financing may, apart from increasing interest expense and gearing, contain restrictive covenants with respect to dividends, future fund-raising exercises, and other financial and operational matters. In any such events, the Group’s growth or financial performance may be adversely affected. (d) Forward-Looking Statements Certain statements in this Prospectus are forward-looking in nature, which are subject to uncertainties and contingencies. All forward-looking statements are based on estimates and assumptions made by the Board, and although believed to be reasonable, are subject to known and unknown risks, uncertainties and other factors which may cause the actual results, performances or achievements to differ materially from the future results, performances or achievements expressed or . implied in such forward-looking statements. In the light of these uncertainties, the inclusion of forward-looking statements in this Prospectus should not be regarded as a representation or warranty by BFood or Amlnvestment Bank that the plans and objectives of the BFood Group will be achieved. (e) Failure or Delay in Listing The occurrence of certain events or cir~umstances which are beyond the Company’s control, may cause the Listing to be delayed or aborted which includes, amongst others, the following:(i) The placees under the private placement tranche of the Offer For Sale fail to acquire the Offer Shares allocated to them;
(ii) The Managing Underwriter and/or Underwriters exercising their rights pursuant to the Underwriting Agreement, discharging themselves from the obligations therein; and/or
(iii) The Company is unable to meet the public shareholding spread requirements as determined by Bursa Securities Le. at least 25% of the total number of shares for which Listing is sought in the hands of a minimum number of 1,000 public shareholders holding not less than 100 shares each. In such event, the Offeror will return in full without interest, all Application monies received in compliance with the provisions of sub-section 243(2) of the CMSA. Nevertheless, as a mitigating factor, the Company’s Directors and Amlnvestment Bank, as the Principal Adviser, will endeavour to ensure that the Group is able to meet the public spread requirements by allocating the Offer Shares applied for by the Malaysian Public to the required number of public shareholders during the balloting process.