Results Highlights

Oldtown Bhd’s 1QFY17 net profit jumped 46.3% Y.o.Y to RM13.9 mln, from RM9.5 mln in the previous corresponding period, mainly attributed to higher export sales generated from the manufacturing of beverages segment, which offsets the weaker performance of the operation of its café chain segment. Quarterly revenue was 9.4% Y.o.Y higher at RM102.9 mln, against RM94.1 mln last year.

The reported earnings came in within our expectations as it accounts to 25.1% of our full-year estimated net profit of RM55.3 mln, while the reported revenue amounts to 24.9% of our estimated FY17 revenue of RM413.9 mln.

Segmentally, the operation of its café chain stores’ pretax profit in 1QFY17 slipped 3.0% Y.o.Y to RM4.3 mln, mainly due to weaker sales contribution during the Ramadhan fasting month. Meanwhile, the manufacturing of beverages division’s pretax profit jumped 68.5% Y.o.Y to RM15.6 mln, attributable to improved cost efficiencies and increased export sales.

The overseas market contributed about 42.0% or RM59.8 mln of Oldtown’s 1QFY17 sales, from 28.5% or RM26.8 mln recorded in 4QFY15, mainly due to stronger sales performance by online retailers and a 240.0% Y.o.Y growth in China, as well as Oldtown’s successful re-launch into the Indonesia and Philippines markets.

We think that the manufacturing and beverages segments will continue to support the group’s earnings amid the slowdown in the local café chain operations. However, we expect consumer spending to normalise post-GST implementation as reflected in the recovery of Malaysia’s consumer confidence (See Appendix 1).

Prospects

Following Oldtown’s territorial license agreement (TLA) with China’s G&L Food and Beverage Management Company Limited (G&L) in July 2016, Oldtown aims to open its first café outlet in the Jiangsu province, China by 2QFY17. Also, the group is partnering Corporate Development Centre (CDC) via the Oldtown Entrepreneur Development Programme, in a bid to identify and train potential entrepreneurs that will assist in the expansion of Oldtown’s café chain. Moving forward, Oldtown expects to open 15 new café outlets in Malaysia and continue with its market penetration into the children and family segment by focusing on Kids and Family marketing strategies.

In its Beverage Manufacturing segment, Oldtown’s plans to grow its market share and maintain its brand presence with aggressive product marketing through multiple outlets. We note that the group’s market share in Malaysia, Hong Kong and Singapore for both the white coffee and coffee mix segment grew slightly between FY16 to FY17.

Oldtown has also diversified its product mix by including Oldtown Mocha coffee and the newly launched the Oldtown Black Series, which features Nanyang black coffee and Nanyang 2-in-1 black coffee. The mocha coffee contributed about 14.0% of the sales from China, while the black coffee segment is expected to grow, albeit on a slower pace due to its smaller market share. Going forward, we think that Oldtown will continue to benefit from its cost-rationalisation strategies amid a marginal increase in the prices of raw materials and higher operating expenses, due to expansion plans in China.

Valuation and Recommendation

With the results coming in within our estimates, we leave our earnings estimates unchanged. We also maintain our HOLD recommendation on Oldtown with an unchanged target price of RM1.95 sen. Our target price is derived from ascribing an unchanged target PER of 16.0x to our FY17 EPS of 12.3 sen. The targeted PER is based on a discount to the 20x-22x average PER of consumer products market leaders like Nestle and Dutch Lady due to Oldtown’s smaller market capitalisation.

Risk to our recommendation and target price include inability to replicate identical food quality and services across its café outlets. Any deterioration of its outlets’ service or food quality will result in a negative impression on the group’s overall brand’s image. Failure to meet or exceed customer’s dining expectations will cause Oldtown to lose its existing market share. Raw materials account to approximately 20%-25% of Oldtown’s overall cost and any fluctuation on global commodity prices such as coffee beans and sugar – the main raw materials, will disrupt earnings growth and margins going forward.

Source: M+ Online Research - 29 Aug 2016