Investment Highlights

• OldTown’s 1QFY18 results were in line as its F&B earnings and robust domestic FMCG sales offset a shortfall in its FMCG export sales. We maintain our BUY recommendation and FV of RM3.20. Our FV is based on 17.0x CY18F P/E, which is a 20% discount to the simple PE of its FMCG peers of 23x.

• OldTown registered a 1QFY18 revenue of RM109mil (QoQ: +2.2%, YoY: +6.2%) as core profit grew to RM16.8mil (QoQ: +69.3%, YoY: +20.8%). It came in line with our and consensus full-year estimates, both at 23%.

• No dividend was declared as expected.

• OldTown’s results key highlights included:
  1. FMCG revenue was largely in line with our expectations, growing 11% YoY. It was boosted by sturdy domestic sales, posting 14% growth as China sales of a similar quantum were softer against our projection of 40% growth. It represents a sharp deceleration from its previous quarter 4QFY17, YoY growth of 71%. We await clarity from OldTown’s analyst briefing today.
  2. FMCG PBT margins were eroded by 2.7ppts to 24.3% off the back of higher input cost. However, with current sugar prices tumbling almost 30% YoY, it could elevate FMCG margins up to 1.3% going forward. Recall, sugar made up 10% of CoS.
  3. F&B revenue was flat despite 9 fewer stores YoY. We estimate that the ASPs for food products were more than 10% higher YoY in 1QFY18. 14 domestic store closures outweighed its overseas store expansion of 5 stores across the region. Going forward, we expect the number of stores to hold steady at 231 stores as overseas store expansion offsets minimal domestic store closures.
  4. F&B PBT margins improved by 4.9ppts YoY to 14.9%, largely due to RM3mil provision of doubtful debts that was written back. This was a write-back against the RM4.5mil provision it recognised in 4QFY17. Aside from that, higher wage cost may have been a contributing factor to additional margin dilution.
  5. Going forward, we expect the F&B segment to supplement franchise fee handsomely. It would drive earnings, which is coming off a low base.

• We leave our FY18F-19F earnings unchanged pending further clarity from OldTown’s analyst briefing today. Key risks are a slowdown in export sales, higher than expected A&P and government policies on foreign labour.

Source: AmInvest Research - 25 Aug 2017