Highlights

F&B: Management shared that the slowdown in total outlets opening in Malaysia was largely due to the lack of manpower (shortage of staffs). Going forwards, the group continues to target 12-15 net outlet openings for CY14 in Malaysia. To date, Oldtown had a net increase of 3 outlets, bringing total outlets to 208.

In China, its central kitchen has already commenced operations. However, Oldtown is taking a step back from ramping up its outlets due to the challenging environment as well as strategizing its position in the country with possibility of having two F&B concepts: coffee shops and restaurants.

Oldtown’s venture in Australia is targeting to open its maiden café outlet within the next 9-12 months, located either in Melbourne or Sydney. The group is looking at opening as much as 44 outlets in the country across 10 years.

The group is also penetrating further into Indonesia, particularly in Medan, with more outlet openings. Oldtown is expected to be releasing an announcement sometime next week regarding its strategy plan in Indonesia.

FMCG: Export market continued to be the earnings driver for the segment with contribution of 58%. Oldtown continues to invest further into promotional campaigns (in Malaysia) and advertisements (in China and Hong Kong) with aim to strengthen its foothold within the Asean region.

The white coffee prospects in Singapore remained promising, recording double-digit yoy growth. Besides, white coffee’s share pie has grew yoy with 42.2% market share in FY14 (FY13: 37.1%).

Oldtown also plans to intensify its marketing initiatives in both Indonesia and Philippines as both countries rank second and third in term of coffee consumption. The group has appointed Indonesia’s PT Sukanda Djaya and Philippines’ Dranix Distributors as key distributors to further widen their coverage nationwide. Both distributors have vast experience in distributing and marketing top range of FMCG brands in the respective countries.

Risks

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

Forecasts

Unchanged.

Rating

HOLD

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

Target price of RM2.29 remained unchanged. However, we are downgrading our BUY recommendation to HOLD as Oldtown’s total return is now below our 10% benchmark.

Source: Hong Leong Investment Bank Research - 20 Jun 2014