Highlights

F&B: Despite the lower number of outlets qoq, management highlighted that this is due to certain outlet closures for renovation / relocations, and the progress of opening new outlets (12-15 per annum) is still on track.

Apart from that, 108 franchise-operated outlets have recently renewed their franchise agreement for another 5 years with fees of RM10k per outlet. This would contribute RM1.08m to the group and will directly flow to its profit.

In China, Oldtown have taken back its operations starting Sept and terminated the existing master license agreement (with no compensation) and is currently finalizing a new jointventure for the central kitchen operations in the country. Post-completion of the exercise, the group will continue its efforts to ramp up its outlet openings, with one new opening in Shenzen in end-Sept.

Oldtown’s first outlet in Australia is targeted to open by 1HCY15, located either in Melbourne or Sydney. Its closest competitor operating in Australia is currently recording revenue of RM300k-500k per outlet per month, which is significantly higher than its outlets in Malaysia.

Oldtown’s second master license agreement in Indonesia, which allows the group to penetrate into the rest of country has already opened several outlets and is very wellaccepted. The group is considering opening several outlets located in airports throughout the country.

FMCG: Export market continued to be the earnings driver for the segment, mainly from China, Hong Kong and Singapore. Oldtown continues to invest further into A&P with aim to strengthen its foothold within the Asean region.

In addition, Oldtown have also incorporated a wholly owned foreign enterprise in the territory of Shenzen, to deal with the wholesale, export, import and related business of coffee products. This is a positive move as it would allow Oldtown to gain better control and monitoring its products pricing and channel development.

Risks

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

Forecasts

FY3/15-16 EPS is reduced by 10-11% to reflect the higher A&P costs for both café outlet and FMCG business.

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 slightly to RM2.17 (from RM2.29) as we increase our P/E multiple to 18x based on FY3/15 EPS for its wider regional reach (still a 20% discount to regional peers)

Recommendation upgraded to BUY (from HOLD) as share price have corrected 12.6% since we downgraded the stock to HOLD and it now has more than 10% potential expected return.

Source: Hong Leong Investment Bank Research - 5 Sep 2014