Investment Highlights

• OldTown’s 2QFY18 results were in line as remarkable China-led FMCG revenue off the back of robust margins offset a sluggish F&B segment. 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.

• An interim dividend of 3.0 sen/share was declared.

• OldTown registered a 2QFY18 profit of RM15.2mil (QoQ: - 9%, YoY: +20%), bringing 1HFY18 to RM32mil (YoY: +21%). It came in line with our and consensus forecasts, at 44% and 46% of our earnings estimates respectively.

• OldTown’s results key highlights included:

i) Cumulative FMCG revenue grew 22% YoY, beating our estimates of 17%. Sales across all geographies with the exception of Hong Kong grew impressively. Most notably, China expanded at a breakneck 78% YoY for the quarter. Cumulatively, China grew c:50% by our estimates, surpassing management’s guidance of 20- 30% growth. It was aided by improved contributions from B2C platforms such as Alibaba.

ii) FMCG PBT margins surprisingly improved for the quarter by 1.6ppts to 25.4%. This is in amid realising 4% higher input cost. We believe cheaper sugar cost may have offset 30% costlier coffee inputs. Alternatively, OldTown may not have actualised its 30% costlier coffee inputs in its inventory. Nevertheless, cost savings realised across its value chain more than offset higher input cost resulting in higher margins for the segment.

iii) F&B revenue declined 5% YoY against 3% fewer stores. Going forward, we expect growth to be supplemented by a renewed regional expansion, specifically in Indonesia and China. Domestically, management looks to rejig store formats into an express ready-to-eat model. We think it is strategically positive seeing it would rejuvenate its franchise model, highly scalable and would be less labour intensive.

iv) F&B PBT margins improved by 4.9ppts YoY to 14.9%, largely due to a 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 weighed on margins.

• We maintain our forecasts with earnings falling in line. Key risks are a slowdown in export sales, higher-thanexpected A&P and government policies on foreign labour. For every RM100 hike in minimum wage, FY18F EPS is impacted by -1.4% by our estimates.

Source: AmInvest Research - 30 Nov 2017