Highlights

F&B: There were a total of 28 outlets undergone renovation in 1HFY15 and newly -renovated outlets recorded a doubledigit growth in sales.

Despite that, the higher generated sales were unable to recover the opportunity lost during renovation period. According to the group, total days lost owing to renovation and upgrade of these 28 outlets totaled 451 days (1.2 years).

That said, there will be no renovations of outlets in 2HFY15 as 2H is the busier-than-usual period (peak period) on the back of school holidays and festive seasons.

Lower A&P spending in 1HFY15 is not expected to continue an these spending will return to its aggressive mode in Nov/Dec when Oldtown launches its new product range, which is the White Curry range (circa RM2.1-2.2m sales).

Lower PBT margin in 1HFY15 is also expected to recover slightly in 2H as the overlapping in foreign labour costs ends. Oldtown is also looking at implementing new POS system which would further improve efficiencies.

FMCG: Decline in FMCG revenue in 1HFY14 was largely due to the 8% decline in export sales (54.5% of total FMCG revenue) arising from execution issues. The decline was due to the delay in labelling & FDA registration (HK, Indonesia and Philippines), delayed order in China and the loss from transitioning between distributors in Malaysia and China. Domestic revenue increased by 11% YTD.

Demand for white coffee remained strong for both domestically as well as regionally, maintaining its strong market position in Malaysia, Singapore and Hong Kong.

We believe Oldtown’s FMCG sales would claw back its momentum in 2HFY15 as all execution issues have been resolved and have return to their usual operations.

The group is also looking at spending circa RM12.4m to automate its packing line. Upon implementation, it would allow Oldtown to save at least RM1.27m annually (based on current output). This installation would be done in Apr-July 2015, and would then result in an improvement in margin, ceteris paribus.

Risks

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

Forecasts

• FY3/15-16 EPS is reduced by 12-23% to reflect lower contribution from both caf e chain and FMCG segment .

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 to RM1.90 (from RM2.17) based on 18x FY3/15 EPS (still a 20% discount to regional peers). Maintain BUY.

Source: Hong Leong Investment Bank Research - 28 Nov 2014