Highlights

F&B: Oldtown continues to target similar amount of new café outlets to be opened in Singapore and Indonesia. However, number of new outlets to be opened for Malaysia and China have been lowered as compared to CY13’s target to only mid-teens (from 20-30) and 4-6 (from high-teens), respectively.

We believe the slowdown in Malaysia arises as Oldtown approaches the saturation point while for China, management mentioned that the lower outlet numbers was due to some reconfiguration and structural changes in its master licensing in the country. Despite that, the group remains optimistic with the market in China.

Its Oldtown Café Grand outlet (previously reported as Signature E-concept outlet) has been performing better-thanexpected and is considering duplicating the business model to high-end shopping malls. However, the group would only target a maximum of 10 of such outlets to be established to maintain its exclusivity.

As for its generic café outlets, Oldtown will be changing the menu of these outlets to serve only combo meals (eliminate a la carte menu items). The move would improve quality (from lesser menu items) as well as efficiencies.

In order to also capture customers during the World Cup period, Oldtown would also be coming out with ready-to-eat meals (such as Nasi Lemak and Meehun Siam).

FMCG: Export market continued to be the earnings driver for the segment with contribution of 56.7%. Nevertheless, the market in Malaysia will continue to be one of the key focuses given its good organic growth rate.

China has overtaken Hong Kong as the largest export market. This is in-line with the group’s aim to further penetrate into the China market given its large market size.

To expedite the process, Oldtown will set up its flagship online store under a leading B2C e-commerce portal via TMall in April. In brief, TMall is an online department store with trusted brand names. Only companies registered in China with at least 5-years existence are eligible to participate in this platform, hence increasing the reliability of its products.

Risks

1) Relatively elastic demand; 2) Quality of food and services; and 3) Rising raw material prices.

Forecasts

We tweaked our FY03/15 net outlet openings assumption lower to 24 (from 32 outlets), mainly in China. As such, FY3/15-16 is lowered marginally by 2-3%.

Rating

BUY

Positives: 1) Strong earnings growth; 2) Market leader under the white coffee business; 3) Decent dividend policy; and 4) Resilient earnings and low capex requirements.

Negatives: 1) Competitive industry with low barriers of entry; and 2) Global economic slowdown could jeopardise group’s sales and earnings.

Valuation

Post-earnings revision, TP is reduced marginally to RM2.29 (from RM2.33) based on unchanged 17x P/E to FY15 EPS. Maintain BUY.

Source: Hong Leong Investment Bank Research - 14 Mar 2014