News

• Oldtown’s wholly-owned subsidiary, Oldtown Logistics Sdn Bhd (OTL) entered into a conditional SPA with JD Group and Mr. Lai Sui Hong to acquire 51% stake in April Eight (China) Ltd (AEC) for HK$3m (RM1.4m).

• OTL has simultaneously entered into a conditional shareholders’ agreement with JD Group and AEC to set out the respective rights and obligation of the shareholders of AEC with respect to the organization, management and operation of AEC.

Comments

• We are positively surprised by the announcement as the acquisition would allow Oldtown group to expedite its expansion plans in China region.

• Oldtown would benefit from this acquisition through AEC’s foreign-owned subsidiary, Guangzhou Supreme Food Service Ltd (GSFS) of which the latter’s principal activity involves in central kitchen business in Guangzhou, PRC.

• We believe this is a positive move as the group’s expansion plans for its café outlets in Southern China will be dependent on the support of a centralized kitchen. It would also ensure the products supplied to the café outlets meet the specifications and food safety standards of both the local authorities.

• The centralized kitchen would also allow for a more consistent delivery of quality of products to the outlets while ensuring price efficiency due to consolidated procurement.

• The total investment of RM1.4m is expected to be paid from Oldtown’s internally generated funds and we believe this would not be a significant burden to the group.

• We remained positive about the group expansion plans (via various tie-up, JVs and acquisitions) and believe Oldtown would be able to strengthen its regional foothold further, of which a success would result in a significant spike in profitability.

Risks

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

Forecasts

• Unchanged.

Rating

BUY

Positives

• 1) Market leader under the white coffee business;2) Decent dividend policy; and 3) 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 RM1.90 (based on 18x FY03/15 EPS) remained unchanged. We advise investors to take the opportunity to accumulate.

Source: Hong Leong Investment Bank Research - 28 Jan 2015