Results Highlights 

• Oldtown Bhd posted a 20.4% Y.o.Y jump in its 2QFY18 net profit to RM15.2 min, from RM12.6 min in the previous corresponding year, lifted by higher revenue contribution from its manufacturing division. Revenue for the quarter also grew 14.7% Y.o.Y to RM114.2 min vs. RM99.5 min previously. Consequently, 1HFY18 net profit expanded 20.6% Y.o.Y to RM32.0 min, from RM26.5 min in 1HFY17, while revenue rose 10.4% Y.o.Y to RM223.5 min, in comparison to RM202.4 min last year. The group has also declared a first interim dividend of 3.0 sen p r share, payable on 2th February 2018. 
• The reported earnings came in within our expectations — accounting to 41.8% of our FY18 forecast net profit of RM76.5 min, while quarterly revenue accounted for 45.9% of our full year revenue estimate of RM486.5 min. We regard the results as a norm, as Oldtown generally registers better results in the second half of the financial year due to seasonal factors. 
• On a segmental basis, the café chain operations posted a 2QFY18 PBT of RM3.4 min (-24.2% Y.o.Y), from RM4.5 min in 2QFY17, weighed down by weaker F&B sales due to lower number of outlets in Malaysia. Meanwhile, the manufacturing division's PBT rose 42.8% Y.o.Y — due to stronger revenue contribution, albeit slightly pulled down by forex losses. 
• Meanwhile, export sales continue to grow in weight against local sales, taking up about 42.9% (or 95.8 mln) of total group revenue in 1HFY18, compared to 41.0% in export sales for FY17 (See Appendix 1). We expect the export sales to maintain its positive growth outlook, in-view of tepid consumer sentiments locally.

Prospects

Oldtown will maintain its aggressive sales and marketing activities, via radio, television, mobile, as well as social media advertising, in order to attract customers ahead of the school holidays and festive holidays. At the same time, the group will continue to dish out its HAPPY SAVERS set meals, in a bid to attract and retain customers, while improving store operational efficiency with ongoing renovations to revamp older café outlets and vigorous staff training.

In a bid to cater to the busy lifestyles of urban customers, the group is also planning to establish On-The-Go outlets, which will feature ready-to-eat meals in kiosks counters located at fuel stations. Meanwhile, overseas expansion will include the potential opening of outlets in three new territories (i.e: Fujian, Shanghai, Cambodia) in 2HFY18, of which the licenses have already been executed and new outlets launched in Indonesia and China.

In the FMCG segment, export sales continued to drive revenue growth (accounting to 63.6% of total FMCG sales in 1HFY18 vs. 61.7% in 1HFY17), boosted by increased penetration on Alibaba and several other e-commerce platforms. Subsequently, Oldtown is planning to allocate higher CAPEX for the manufacturing division to increase automation in its processes.

All-in-all, we foresee the local F&B segment remaining lacklustre amid weak consumer sentiment (See Appendix 2) and rising inflation. Meanwhile, the lower individual income tax rates, BR1M payouts and special payments to civil citizens announced in the Malaysian Budget 2018 is expected to raise disposable income, albeit we think that the measures is only a temporary balm to the depressed consumer sector and thus, unlikely to significantly boost consumption spending in the long-term.

We think consistent promotional activities and meal sets will bode well for Oldtown, anchoring the local café outlets’ sales, while ongoing international expansion will enable the group to offset the prevailing weak business environment back home. We also forecast higher revenue contribution in the coming quarter due to the annual sales event (i.e.: 11/11, 12/12) in China. Downside risks include potentially thinning margins, due to higher sales and marketing expenses, coupled with rising raw materials prices.

Valuation and Recommendation

With the earnings broadly within our estimates, we leave our earnings forecast unchanged and we maintain our BUY recommendation on Oldtown with an unchanged target price of RM3.10, as we expect results to play catch up in 2HFY18, on the back of seasonal increases, in-tandem with festive seasons and annual sales like 11/11 in China. Our target price is derived from ascribing an unchanged target PER of 19.0x to its unchanged FY18 EPS of 16.5 sen.

The target PER is based on a discount to the average PER of consumer products bellwethers 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. 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 Nov 2017