News

Oldtown’s wholly-owned subsidiary, Kopitiam Asia Pacific (KAP), has executed a Master License Agreement (MLA) with OTK (Australia) Sdn Bhd and Mr. Leong Kwan Yew.

The MLA would enable the Master Licensee (OTK) to have an exclusive right to operate Direct License within Australia only and would agree to pay the Licensor a non-refundable license fee, outlet opening fee, royalty and market development fund (Figure 1).

The agreement tenure is 5 years and may be renewed for another 5 year. The Licensor shall be granted by the Licensee an option to buy and/or subscribe between 19%- 51% shareholding with purchase price tabulated in Figure 2.

Comments

We are positively surprised by the collaboration as we did not expect the group to enter into the Australian market so soon, given that it has been concentrating in expanding its café outlets and FMCG networks in China and Hong Kong.

However, we believe this is an optimistic move which would enable Oldtown to widen its international market. Currently, Oldtown’s café outlets only exist in Malaysia, Singapore, Indonesia and China.

Due to limited information, we are unable to run a profitability test of the Australian market to Oldtown’s overall earnings. However based on Figure 1, Oldtown could potentially earn an average of RM17.5k/outlet/year (3% + 1% of monthly gross sales, representing royalty fees and market development fund respectively). This back-of-the envelope calculation is based on an average sales/overseas outlet/year of RM438k.

Should Oldtown’s café outlets’ business model in Australia received positively response, we believe this would boost the group’s earnings over the long-term given that the fees earned will directly flow down to the bottom line given limited costs involved. Moreover, the option to acquire an equity stake could be another earnings driver given that the indicative pricing looks fair.

Risks

• Relatively elastic demand.
• Poor quality of food and services.
• Poor market acceptance on kiosk business model.
• Rising raw material prices.

Forecasts

Unchanged pending further information. Oldtown is expected to release its FY14 results and analyst briefing on 28 May and 19 June 2014, respectively.

Rating

BUY

Positives

• Market leader under the white coffee business;
• Decent dividend policy for a new 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

We are keeping out target price and recommendation unchanged. Maintain BUY with TP of RM2.29 based on unchanged 17x P/E to FY15 EPS

Source: Hong Leong Investment Bank Research- 20 May 2014