News

Oldtown’s wholly-owned subsidiary, Old Town (M) Sdn Bhd, entered into a S&P agreement to acquire 1.4m ordinary shares in Advance City Ltd (ACL), representing 70% of the issued and paid up share capital in ACL, for cash consideration of HK$67m (RM26.4m). ACL is Oldtown’s existing sole distributor in HK and China.

The acquisition will be fully funded by the proceeds raised from the private placement which was completed in Dec 12.

Comments

We are positive with the acquisition as this would improve the group’s export sales under its Fast Moving Consumer Goods (FMCG) segment. It enhances Oldtown’s control of the current distribution operation with the objective to maximize the sales potential for greater financial return.

It also allows the group to gain direct access to ACL’s existing management, marketing operations and distribution network. Oldtown will be able to participate directly in the pricing, marketing and branding strategy.

The pricing is deemed fair as it values ACL at 6.73x P/E based on ACL’s FY12 earnings of HK$14.23m (RM5.6m) visà- vis Oldtown P/E multiple of 18.5x based on FY12/12’s EPS.

We believe this exercise is earnings accretive to the group as it will widen the group’s distribution network, especially in HK and Guangdong, China, as both these areas contributes to ~50-60% of Oldtown’s total exports under FMCG. Currently, ACL has a total of 2,800 distribution points, of which ~1,400 are in HK and ~1,400 are in Guangdong.

Moreover, we believe that with the completion of its new factory (that will increase its capacity by 4x), Oldtown will be well positioned to cater to the large population in Guandong, which is 3-4x larger than Malaysia’s.

Futhermore, this acquisition is in-line with our view of that Oldtown will be growing its FMCG exports line, further widening Oldtown’s overall margins (FMCG’s margins are wider as compared to the margins from café outlet operations).

Risks

• Relatively elastic demand.
• Poor quality of food and services.
• Poor market acceptance on kiosk business model.
• Rising raw material prices.

Forecasts

• Unchanged.

Rating

HOLD

• Positives
  • Market leader under the white coffee business;
  • Decent dividend policy for a new listed company; and
  • Resilient earnings and low capex requirements.
• Negatives
  • Competitive industry with low barriers of entry; and
  • Global economic slowdown could jeopardise group’s sales and earnings

Valuation

Target price remained unchanged at RM2.47 based on 15x FY03/14 P/E. However, we are downgrading Oldtown from BUY to HOLD as share price has surged 8.7% since our initiation on 3 Jan 2013.

Source: Hong Leong Investment Bank Research - 09 Apr 2013