Results Highlights

• Oldtown Bhd’s 3QFY18 net profit plunged 52.2% Y.o.Y to RM11.6 mln, from RM24.4 mln a year ago, mainly due to thinner margins and a forex loss of RM1.9 mln. Quarterly revenue also declined marginally by 1.0% Y.o.Y to RM114.6 mln, from RM115.8 mln in the previous corresponding period. Subsequently, 9MFY18 net profit narrowed by 14.2% Y.o.Y to RM43.6 mln, from RM50.9 mln in 9MFY17, despite a 6.3% Y.o.Y growth in revenue. The weaker bottomline resulted from the significantly weaker 3QFY18 performance amid rising raw material prices and the stronger Ringgit.

• The reported earnings were below our expectations, accounting to only 57.0% of our FY18 previous forecast net profit of RM76.5 mln, although revenue was within our forecast – coming in at 69.5% of our full year revenue estimate of RM486.5 mln. This comes as a surprise to us as Oldtown usually performs better in the latter half of the year, owing to seasonal offers and promotions. The difference was mainly due to weaker-than-expected contribution from the FMCG segment as it incurred higher operational expenses and raw material prices, as well as negative forex movements.

• Both the manufacturing and FMCG divisions registered double-digits decline in their 3QFY18 pretax profit to RM4.6 mln (-23.0% Y.o.Y) and RM11.6 mln (-52.0% Y.o.Y) respectively on the aforementioned reasons, although the FMCG segment was more badly hit as a large portion of its sales were export-oriented.

• Export revenue, meanwhile, contributed about 43.0% of total group revenue, from 41.0% previously (refer Appendix 1), supported by Oldtown’s export market in both the manufacturing and FMCG segments. We foresee the prevailing trend to continue in the future due to the tepid local consumer sentiment.

Prospects

Café outlets rose to 237 outlets, from 232 outlets in 2QFY18, mainly in its Malaysian operations as Oldtown capitalise on its lower cost model (OldTown White Coffee Basic) amid subdued consumer sentiment and higher raw material costs. The group is also actively improving the operational efficiency of its Singaporean cafés, while assessing the potential of partnering with third party delivery companies in a bid to boost revenue. At the current juncture, Oldtown plans to focus its international expansion in the China and Indo-China markets, while long-term growth strategy could include the Middle East (halal) markets.

We also foresee continuous growth in the FMCG segment, particularly Oldtown’s overseas markets which will be driven by sales in China, Australia, USA, Indonesia and Philippines.

Moving forward, we think that margins will be hampered by rising raw materials costs and the stronger local currency. Meanwhile, rising inflationary pressures in the local backdrop and competitive pricing in Oldtown’s ‘Happy Savers’ value meals will also limit the group’s ability to fully pass through the additional costs to its customers.

We note that Jacobs Douwe Egberts Holdings Asia (JDE Asia) had completed the acquisition of a 52.9% of Oldtown’s total shareholding as at 26th February 2017, turning its takeover offer unconditional. Subsequently, the offer by JDE for the remaining Oldtown shares which it does not own will remain open till 13th March 2017. We maintain that the buyout offer is reasonable and represent an opportunity for minority shareholders to realise their investment in Oldtown with a potential cash gain of 2.0 sen per share (+0.9%) from its current price of RM3.16.

Valuation and Recommendation

As the reported earnings were below out estimates, we adjust our forecast FY18 net profit lower by 18.1% to RM62.6 mln to reflect thinner margins, following rising operational costs and appreciating Ringgit. However, we maintain our HOLD recommendation on Oldtown with a higher target price of RM3.20 (slightly higher compared to the takeover offer price offered by Jacobs Douwe Egberts' after rolling forward our valuations to FY19. Our target price is derived from ascribing a higher target PER of 22.0x (to reflect the higher valuations of consumer products bellwethers like Nestle and Dutch Lady) to Oldtown’s FY19 EPS of 14.7 sen.

Meanwhile, the target PER remains at 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 - 28 Feb 2018