Investment Highlights

• FMCG continues to make good progress with margins to normalise going forward with higher input cost and A&P spending. 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 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 all its core markets and outstanding operational track record.

Key takeaways from OldTown’s briefing included:

i. In regards to Double 11 sales, early indicative ecommerce sales posted an impressive YoY sales growth of c:30% (vs 3QFY17: 198%). It should cumulatively drive 9M China FMCG growth beyond >30%. While we are buoyed by the early indications, we maintain our overall 20% export FMCG growth assumption for FY18 seeing management expects sales to normalise in 4QFY18.

ii. Domestic FMCG sales for the quarter grew close to 30% YoY. Management attributed it to the penetration of underserved trade channels, specifically its general trade. We are positive over the concerted effort to regain domestic market share and re-establish domestic growth (3 yr CAGR FY14-FY17: 3.8%). Full-year sales should comfortably meet our domestic FMCG sales assumption of 11.9% with cumulative 1HFY18 YoY sales achieving 15.6% already.

iii. Recall FMCG PBT margins improved 1.6ppts for the quarter despite 4% higher input cost. It was due to management: i) lowering trade margins to its distributors; and ii) raising ASPs by ~3% to pass cost through to its customers. However, we expect margins to take a step down in 2H YoY with 30% costlier coffee inputs (coffee inputs consist about 35% of COGS) and substantial 2H A&P spending.

iv. We continue to expect overseas expansions to drive overall store additions. Management’s efforts to rejig store formats into an express ready-to-eat model could rejuvenate the franchise. While we note OldTown has introduced various store formats in the past with limited success, we like its slated store format for its low dependence on labour.

• We make no changes to our earnings estimates as we expect more robust growth to offset weaker margins ahead. Key risks include its USD/MYR forex exposure, higher-thanexpected A&P and lower-than-optimal fulfillment orders.

Source: AmInvest Research - 4 Dec 2017