News

A wholly-owned subsidiary of Oldtown, Kopitiam Asia Pacific Sdn Bhd, will be executing a second Master License Agreement (MLA) with PT Oldtown Indonesia.

PT Oldtown Indonesia is currently licensed to establish and operate Oldtown White Coffee outlets and grant sub-licenses to sub-licensees in the territory of Jawa and Bali via its first MLA.

The duration of the MLA is 5 years and may be renewed for another 5 years and further details of the fees to be paid by the licensee to licensor is illustrated in Figure 1.

Comments

This is not a surprise as management has indicated, during its analyst briefing last Thursday, that the group will be venturing further into other parts of Indonesia (refer report dated 20 June 2014: “Expansion Mode Still On”).

We are slightly positive about this deal as we believe this is an optimistic move which would enable Oldtown to widen its international market.

Based on Figure 1, apart from a one-off fee of US$125k + US$10-15k. Oldtown could also potentially earn an average of RM22.8k/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 RM570k recorded in FY14.

Oldtown is targeting to open 3-5 more outlets in the remaining 9 months of CY14.

Since Oldtown started operation in Indonesian, response have been well-received by the locals. Hence, we believe Oldtown’s initiative in penetrating further into the country would further boost its foothold as well as improve its profitability going forward.

Risks

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

Forecasts

Unchanged.

Rating

HOLD

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 jeopardize group’s sales and earnings

Valuation

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

Source: Hong Leong Investment Bank Research - 23 Jun 2014