Results Highlights

• Oldtown Bhd posted a 46.0% Y.o.Y decline in its 4QFY17 net profit to RM9.9 mln, from RM18.4 mln in the previous corresponding period, impacted by weaker performance from the café chain and manufacturing divisions, as well as a provision made for doubtful debts, which amounted to RM4.8 mln. Revenue for the quarter, however, rose marginally by 2.3% Y.o.Y to RM107.0 mln against RM104.5 mln a year ago.

• Meanwhile, full year net profit expanded 16.3% Y.o.Y to RM60.8 mln, from RM52.3 mln a year ago, mainly due to strong export sales and forex gains from its manufacturing division. Similarly, revenue was also 8.1% Y.o.Y higher at RM425.2 mln, compared to RM393.4 mln previously. The group has also proposed a final single dividend of 1.0 sen and special dividend of 3.0 sen per share.

• The reported earnings came in marginally below our expectations – accounting to 92.1% our full year estimated net profit of RM66.0 mln, although the reported revenue came within our expectations, accounting to 99.0% of our FY17 revenue forecast of RM429.5 mln. The earnings variance was mainly due to lower margins as the group experienced rising raw material prices and higher other operating expenses.

• Segmentally, 4QFY17’s pretax profit from the café chain operations plunged 73.0% Y.o.Y to RM1.1 mln, from RM4.0 mln in 4QFY17, attributed to lower revenue and a RM4.8 mln provision for doubtful debts on overdue trade receivables. Similarly, the manufacturing segment’s pretax profit also declined by 32.0% Y.o.Y to RM11.5 mln, from RM16.9 mln in 3QFY16, due to higher selling and distribution expenses.

• Meanwhile, full year pretax profit for the café outlets segment was 21.5% Y.o.Y lower at RM16.0 mln, from RM20.4 mln in FY16 – due to lower revenue, higher staff costs in-tandem with the hike in minimum wage and a provision for doubtful debts on overdue trade receivables , mainly due to the closure of a key outlet in Singapore.

Prospects

The net growth of its café outlets was flattish in 4QFY17, amid the persistently weak consumer sentiment in the local backdrop. With a total of 234 café outlets, the majority of Oldtown’s outlets are still located in Malaysia, even as the group looks to international expansion in a bid to increase its earnings to counter the challenging operating environment back home.

As part of ongoing efforts to attract and retain customers, the group has rolled out a brand new look for its menu, coupled with aggressive advertising and promotions including its signature set ‘Happy Savers’ value meal and Ramadhan promotions, ahead of the Ramadan festival. Oldtown also aims to expand its outlets, with eight new stores earmarked for Malaysia, while international expansion will be targeted towards the Indo-China and China markets. Tentatively, we also expect two new outlets to be opened in Myanmar by June 2017.

Meanwhile, FY17 pretax profit and revenue from Oldtown’s FMCG segment gained 32.7% Y.o.Y and 17.2% to RM63.0 mln and RM233.8 mln respectively, boosted by strong double-digit growth in its export market, although full year earnings were capped slightly in 4Q17, mainly due to higher selling and distribution expenses arising from marketing expenses incurred during the double 11, as well as the double 12 sales event. The group has also achieved a key milestone in strengthening its market position in Australia, following the launch of its coffee products in supermarket giants, Woolworths and Coles.

Moving forward, Oldtown plans to acquire new machineries to ramp up its capacity to cater to higher demand, mainly driven by its key export markets in Greater China (i.e.: Mainland China, Hong Kong and Taiwan) and has allocated about RM12.0 mln for Automation Line Phase 2 to improve its operational efficiency. We note that China’s online FMCG sales grew at a significant five-year CAGR of 78.4%, compared to 10.7% in the U.S. and 24.6% in SEA countries (refer to Appendix 1) during 2010 to 2015. With exposure in two of China’s most prominent online marketplace - Taobao and Tmall, we remain sanguine of the solid growth prospects of Oldtown’s FMCG segment, in-tandem with the growing trend of online shopping, spurred by the rising need for convenience and the lower prices available in online stores. Domestically, the group is also on track to launch its products on e-commerce platforms like 11street and Lazada.

In conclusion, we maintain a positive view on Oldtown’s long-term growth, which is likely to be driven by the FMCG segment as the group strategically positions itself to take advantage of the rising trend of online purchases to offset the prevailing slowdown in its café chain operations amid the subdued consumer sentiment in the local market.

Valuation and Recommendation

Although the reported earnings came in below our estimates, we raised our earnings forecast for FY18 by 6.0% to RM76.5 mln, on improving margins and higher exportdriven sales revenue, although the upside could be capped by the strengthening Ringgit. Following the conclusion of FY17, we also introduce our earnings and revenue estimates for FY19 at RM83.3 mln and RM519.0 mln respectively. Meanwhile, we maintain our HOLD call on Oldtown, with a higher target of RM2.80 (from RM2.50). The group’s prospective FY18 PER of 16.8x is higher than the industry average PER of 15.0x, indicating limited upside at this juncture.

Our target price is derived from ascribing a revised target PER of 17.0x to our revised FY18 net EPS of 16.3 sen. The target PER remains based on a discount to the 22.0x- 27.0x PER of consumer products bellwethers like Nestle and Dutch Lady due to Oldtown’s smaller market capitalisation. We lift our target PER to reflect its improved prospects in FY18.

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. Any fluctuation on global commodity prices such as coffee beans and sugar – the main raw materials, will also disrupt earnings growth and margins going forward.

Source: Mplus Research - 30 May 2017