Investment Highlights

• We come away OldTown’s briefing feeling assured over a temporary supply chain glitch contributing to soft China growth. Optimal operations have since resumed. We maintain our BUY recommendation TP of RM3.20. Our TP is based on 17.0x CY18F P/E, which is a 20% discount to the simple average PE of its FMCG peers of 23x. We continue to like OldTown for its export-driven growth, market leader as #1 white coffee brand in its core markets and outstanding operational track record.
  
  Key takeaways from OldTown’s briefing included:-
  1. For the quarter, China FMCG sales registered 14% YoY. It was softer than expected, with management expecting between 20-30% growth per annum over the near term. Seeing the shortfall to our earlier assumption of 40%, we now assume a 22% growth rate for FY18F. It is the average of 1QFY18 and midpoint of management’s guidance. We gather that the shortfall arose from its supply chain being disrupted, resulting in lower fulfillment of orders. It has since been resolved.
  2. Meanwhile, domestic FMCG sales surged 14%, surpassing our 3% assumption. Management attributed it to A&P driven initiatives over the quarter. It is rather positive seeing the broader F&B industry saw pretty flattish volume sales over the same comparative period.
  3. We expect capex spending to peak in 3QFY18, driving further automation on its FMCG production. It is part of their cost initiative which included cheaper packaging and incorporation of cheaper raw material in the past. It will take in full effect over FY19F as OldTown looks to benefit from its increasing economies of scale. iv. As expected, OldTown will realise 30% more costly coffee inputs in 2QFY18 relative to FY17 due to the recontracting of its yearly coffee supply contract. We had already accounted for higher coffee cost in the previous quarter. However with the down trending sugar and palm oil based non-dairy milk prices coupled with the purchase on a rolling basis, it could well alleviate the higher coffee cost.

• We make no changes to our earnings estimates as our domestic sales changes offset our lower China export sales assumption. Key risks include its USD/MYR forex exposure, higher than expected A&P and lower than optimal fulfillment orders. Upside to our forecast includes falling palm oil prices. A 10% deviation from our MYR4.40/USD and palm oil assumption would impact our FY18F EPS by approximately 8% and 5% respectively (Exhibit 2).

Source: AmInvest Research - 28 Aug 2017