Results

In Line – Reported 1QFY14 PATAMI of RM12.18m or accounts for 23.4% of our full year forecasts, which we consider in line as we expect stronger results in the remaining 9 months from the advertising efforts into the Muslim market. Comparing against streets’ estimates, Oldtown’s earnings came slight below estimates or 22.6%.

Deviations

None.

Dividends

None. We expect the group to declare dividends in 2Q and 4Q this fiscal year (FYE March).

Highlights

Revenue: Revenue growth of 3.2% qoq and 7% yoy largely contributed by the double-digit growth from its FMCG segment. The boosts were attributable to Advance City Ltd which Oldtown have acquired a 70% stake in April ’13 coupled with the help from its new beverage manufacturing facility located in Ipoh.

Earnings: PBT were impacted for both qoq and yoy due to the higher operating expenses incurred during the quarter from higher depreciation and overhead costs, as well as the higher expenses incurred during the testing and commissioning for the new machinery. However, PATAMI’s better performances were helped by the lower tax rate of only 20.6% vs. 24-26% historically.

Oldtown has a total of 225 café outlets as at June ‘13, representing an additional 39 outlets in total compared to 1QFY13. However comparing on a qoq basis, only 3 additional outlets were opened. With that, we continue to remain conservative in our outlet opening assumptions (17 outlets) vs. group’s plan of 27-41 outlets, excluding China.

The new food processing plant (central kitchen) is on track to be ready for commercial production by end-2013. Upon commencement, outlet expansion is expected to accelerate at a faster pace. As such, we are expecting the group to open up at least 5 outlets p.a. in from FY15 onwards.

Risks

• Relatively elastic demand.
• Quality of food and services.
• 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 newly 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

Given that share price have retraced 20% since our SELL call in mid-June, we upgrade Oldtown to HOLD with unchanged TP of RM2.43 based on unchanged 17x P/E to FY14 EPS.

Source: Hong Leong Investment Bank Research - 29 Aug 2013