Highlights

There were no major updates / news announced during the analyst briefing which was held yesterday, 5 Dec 2013.

F&B: There were only 5 new café outlets opened throughout 9MCY13 due to the relocation and/or closures of 9 exiting outlets which was then offset by 14 new openings.

Singapore has a net of -2 outlets due to the expiry of tenancy agreement and relocation of these outlets (4QCY13).

The narrower-than-expected margins under the F&B operations was largely due to higher A&P and selling & distribution costs, lower net service charges receive and lower share of associates’ profits.

Oldtown also entered into a MoU with Shell Malaysia to operate kiosk outlets within the vicinity of Shell petrol station. Currently the group is running on a trial basis in Shell at NKVE. The group aims to open 20-30 outlets/year.

Oldtown has appointed April Eight (Guangzhou) Ltd to produce the core pastes and sauces for Oldtown cafe outlets in Guangdong Province.

FMCG: Despite higher production, utilization rate of the segment dropped to 39% from full capacity postcommencement of the group’s new factory plant (which increases its capacity by 3x from 8,000 mt/annum to 24,000 mt/annum.

The export market has dominated Oldtown's FMCG operations, taking up about 56.5% of the segment revenue. In 1HFY14, China (10%), Hong Kong (40%) and Singapore (10%) cumulatively contributed about 80% of export market sales with the remaining 20% from other countries.

Oldtown is putting in more efforts in penetrating more into the China market by participating in China’s social media, Weibo and putting advertisements on Hong Kong MTR stations.

Risks

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

Forecasts

Unchanged.

Rating

HOLD

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

Maintain HOLD with unchanged TP of RM2.39 based on unchanged 17x P/E to FY14 EPS

Source: Hong Leong Investment Bank Research - 6 Dec 2013