Highlights 

We  noticed  Oldtown’s  share  price  weakness  lately  and  saw active  disposals  from  foreign  investors .  Based  on announcements  on  Bursa  Malaysia,  approximately  6.3m shares  have  been  disposed  by  foreign  investors,  or equivalent  to 1.4% of total shares outstanding.

We  believe  the  disposals  was  due to Oldtown’s weaker-thanexpected  1QFY15  results  in  late-Aug.  To  recap,  the  group reported  revenue  growth  of  7.3%  yoy   from  higher  revenue per  café  outlets  as  well  as  further  growth  from  FMCG segment.  However,  PATAMI   declined  4%  due  to  higher operating  expenses,  namely  advertising  and  promotional expenses.

Despite  the  weaker  1QFY15  performance,  we  believe  the group  would  be  able  to  meet  our  earnings  forecasts  of RM54.6m,  supported  by  the  revamp  plans  on  F&B  in  China as  well  as  expanding  its  business  model  to  Australia.  The group  will  be  opening its maiden outlet in either Melbourne or Sydney  by  1HCY15  and  targets  to  have  a  minimum  of  44 outlets within the next 10 years.

Domestically,  Oldtown  plans  to  expand  its  products  reached to  family  and  kids  segment  and  is  lo oking  into  launching junior  meals  as  well  as  experimental  trials  on  the  use  of discounting coupons.

Also,  Oldtown  have  engaged  with  one  of  the  key  distributors (for  FMCG  segment)  in  Indonesia  and  Philippines,  widening its  network  in  both  of  these  countries .  Other  than  that,  the group  will  also  continue  its  aggressive  marketing  and promotional  activities in Hong  Kong and China as well.

Despite  concerns  of  weaker  consumer  sentiment  due  to subsidy  removals  which  would  subsequently  reduce consumers’  purchasing  power,  we  believe  F&B  operators would  not  be  impacted  significantly  as  long  as  pricings remain competitive.

Furthermore,  Oldtown  have  embarked  into  super  savers campaign  currently  focusing  on it s dinner set meals, allowing consumers  to  be  able  to  have  all-in-one  under  one  price. GST-wise,  it  is  still  uncertain  on  how  it  would  impact Oldtown’s earnings  post-implementation  at this juncture.

Risks 

• Relatively  elastic demand
• Quality of food  and services
• Rising raw material prices.

Forecasts 

• Unchanged.

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 

• BUY  recommendation  and  target  price  of  RM2.17  (based  on 18x  FY3/15  EPS)  remained  unchanged.  We  advise  investors to take the opportunity  to accumulate.

Source: Hong Leong Investment Bank Research - 7 Oct 2014