Highlights

F&B: As at Mar ’13, 170 outlets have been halal-certified (out of 199 outlets in total) and the remaining are expected to be certified by end of 2QCY13.

Oldtown have already carried out their marketing efforts in cultivating its customers with its halal status on all its outlets, especially customers from the Muslim market. The group expects to penetrate only ~20-25% despite the large population in the Muslim market.

The group has also introduced an all-day set menu, which are more affordable among consumers from low- to middle income people. In addition, Oldtown is undergoing rebranding exercises through changing its marketing posters, outlet layout and introducing a new corporate tagline.

On expansion plans in CY13, Oldtown intends to open up 27- 41 outlets (excluding China). However, YTD it has only 2 new outlets. China is expected to have 30 outlets by 2014 and the expansion will be accelerated once its central kitchen is up and running by end-2013.

The group have decided on the 3 locations to place its kiosk business, namely in Avenue K, Senai International Airport and NKVE’s Shell station. These 3 kiosks are expected to open in 2QCY13.

FMCG: Management have highlighted that the sales for FMCG goods will remain flattish for 2QCY13 due to the delay in its new factory in Ipoh. Sales will only grow further upon the commencement of the plant, which is slated for operation by the third week of July.

On the other hand, it is also actively seeking more potential distributors in different countries to improve its market share and sales. It is expecting more sales to come in by year end as it continues to collaborate with various distributors regionally.

Risks

• Relatively elastic demand.
• Quality of food and services.
• Rising raw material prices.

Forecasts

Due to the slow progress of new outlets, we tweaked our outlets assumption and hence cut our FY14 and FY15 EPS by 13% and 16% respectively.

Rating

SELL

Positives

• Strong earnings growth (2-year CAGR of 13.9%);
• Market leader under the white coffee business;
• Decent dividend policy of 50% for a newly listed company;
• 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

Post-earnings revision, TP is lowered to RM2.43 from RM2.80, based on unchanged 17x P/E to FY03/14 EPS, circa 15% discount to regional peers’ average of 20x (which are much larger in terms of market cap). Therefore, we downgrade to SELL.

Source: Hong Leong Investment Bank Research - 19 Jun 2013