Results

Below Expectations – Reported 1HFY14 PATAMI of RM23.56m came in slightly below expectations, accounting for only 45.4% and 43.6% our ours and streets’ full year forecasts.

Deviations

Lower-than-expected café outlets opening as well as revenue per outlet.

Dividends

None.

Highlights

1HFY14 revenue grew 10% contributed largely by the double-digit growth under Oldtown’s FMCG segment (+22.8%). However, earnings experienced slower growth on the back of higher operating costs (minimum wage ruling, advertising costs, promotion fees and selling and distribution expenses), partially mitigated by lower effective tax rate of 20.9% vs. 24.8% in 1HFY13.

Oldtown has a total of 227 café outlets as at Sept 13, representing an additional 17 outlets in total compared to 1HFY13. However comparing on a qoq basis, only 2 additional outlets were opened.

The new beverage manufacturing facility is expected to provide an additional production capacity of about 300% compared to 2012, sufficient to cater to rising demand over the next 5 years.

On a separate announcement, Oldtown proposed a bonus issue of up to 90.75m ordinary shares on the basis of one bonus shares for every 4 existing shares. This translates to an adjustment factor of 0.8x to its share price and our target price (TP) upon ex-date.

The proposal is subject to approvals from Bursa Securities, shareholders of Oldtown and other relevant authorities, and is expected to be completed in 1QCY14.

Risks

• Relatively elastic demand.
• Quality of food and services.
• Market acceptance on kiosk business model.
• Rising raw material prices.

Forecasts

We tweaked down our FY14 assumption on number of café outlet openings from 17 to 10 outlets. Hence, our FY14-16 EPS forecast is reduced by 1-2%.

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

Post-earnings revision, TP is reduced by 1.6% to RM2.39 (from RM2.43) based on unchanged 17x P/E on FY14 EPS. Maintain HOLD. Ex-bonus price and TP are RM1.97 and RM1.91, respectively.

Source: Hong Leong Investment Bank Research - 28 Nov 2013