Results Highlights

• Oldtown Bhd’s 1QFY18 net profit rose 20.8% Y.o.Y to RM16.8 mln, from RM13.9 mln in the same quarter last year, largely aided by a writeback on a provision for doubtful debts of RM3.1 mln, albeit slightly offset by unrealised forex loss (RM2.1 mln) and higher selling and distribution expenses. Quarterly revenue, meanwhile, gained 6.2% Y.o.Y to RM109.3 mln, from RM102.9 mln previously.

• The reported earnings were slightly below our expectations – accounting to 21.9% of our FY18 forecast net profit of RM76.5 mln, while quarterly revenue accounted for 22.5% of our full year revenue estimate of RM486.5 mln. Even so, we expect better results in the coming quarters due to seasonality factors in 2HFY17, underpinned by festive seasons and promotional events like the double 11 (11/11) and double 12 (12/12) annual sales.

• Segmentally, the café chain operations posted a 49.1% Y.o.Y jump in 1QFY18 pretax profit to RM6.5 mln, from RM4.3 mln in the last corresponding year, mainly due to the RM3.1 mln writeback on the provision of doubtful debts. Meanwhile, normalised pretax profit excluding the aforementioned one-off provision gain would fall to RM3.4 mln (-21.5% Y.o.Y) amid the prevailing weakness in the local consumer market sentiment. The manufacturing division was flattish at RM15.5 mln, weighed down by unrealised foreign exchange loss and higher selling and distribution expenses.

• Moving forward, we expect Oldtown to register positive earnings growth in FY18 to FY19 (FY18: +25.9%, FY19: +9.8% respectively), driven by higher export sales, in tandem with its international expansion plans and improved performance of the FMCG segment - on the back of the strong growth trajectory of online shopping.

Prospects

Oldtown’s total number of café outlets fell to 231 outlets (from 234 outlets in 4QFY17), following the closure several local outlets amid rising cost of business and tepid consumer sentiment in Malaysia. The group has also expanded its regional footprint with the opening of four new café outlets in Singapore, Indonesia and China in the current quarter.

Going forward, Oldtown is expected to complete the revamping of its outlets (i.e.: new store design) and add eight new café outlets locally. Meanwhile, China and Indo-China markets will remain as Oldtown’s primary expansion targets as the group seeks to overcome the persisting headwinds of sluggish consumer sentiment back home.

In the FMCG segment, Oldtown continues be unrivalled as the No. 1 white coffee brand across its key markets (i.e.: Malaysia, Hong Kong and Singapore), while newly released products like the ‘Less sugar variant’ saw positive feedback after the launching in regional markets, in tandem with increasing health awareness among consumers.

In the near term, we expect export sales to remain as the segment’s major revenue growth driver, underpinned by i) rising trend of e-commerce transactions, ii) Oldtown’s strategic positioning in notable e-commerce platforms like 11street, Lazada, Taobao and Tmall, iii) strong revenue growth from China - estimated 20.0%-30.0% growth, and iv) aggressive marketing and promotional activities to maintain the ‘Oldtown’ brand name as one of the leading household coffee producer.

Valuation and Recommendation

Although the reported results were under our estimates, we leave our earnings forecast unchanged and we maintain our HOLD recommendation on Oldtown with a higher target price of RM2.95 (from RM2.80). The lift was attributed to a higher target PER of 18.0x (from 17.0x) to its unchanged FY18 EPS of 16.3 sen, in tandem with the higher valuations of sector giants like Nestle and Dutch Lady.

Nevertheless, Oldtown’s valuations are already fair at the current juncture as the group’s forward FY18 PER of 16.9x is close to the industry average PER of 17.0x, indicating limited upside, in our view.

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 - 28 Aug 2017