Highlights

• F&B: Management shared that the improvement in café chain’s 9MFY15 revenue were mainly coming from higher contribution from its overseas market (+11%), especially from Singapore.

• PBT however declined marginally by 0.3% on the back of higher operating costs and selling & distribution costs. We gather that labour costs have increased quite substantially from 16.5% of total costs 4-5 years ago to 21.0% today. This was partially offset by slightly lower cost of goods by 1-2%.

• Beginning March 2015, Oldtown have revamped its menu offerings, giving prominence of products that are manufactured in-house. The revamped menu now allows more flexibility by choosing a combo based on customer’s own preference. This would also encourage higher spending ticket per customers.

• As for outlet expansion focus, the group aims to open 8-10 outlets in Malaysia (basic, signature and grand), 2-3 basic outlets in Singapore, 8-10 generic outlets in Indonesia, 2 outlets in both China and Australia. The maiden outlet in Australia is targeted to open in 1QFY16.

• FMCG: Growth in FMCG’s 9MFY15 revenue (+3%) was largely contributed by exports which increased by 4%, led by growth in China of 13%. Sales from HK and China have recovered in 3QFY15 (+30% qoq) after resolving its execution issues in previous quarter.

• PBT only grew 1% with slight margin compression of 38bps from its aggressive advertising and promotional activities in its export market, offset by cheaper raw materials and effective costs saving measures.

• Management guided that the group will continue to invest in advertising and promotional activities going forward as it sees positive impact to export sales. Furthermore, the total coffee mix in HK has been overtaken by white coffee with share of 53% (FY13: 50%).

• Domestically, Oldtown remained confident with Malaysia’s general trade distribution restructuring and consolidation will further spur sales. According to management, all major supermarkets in the country have been performing fairly well with 20% increase in sales.

Risks

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

Forecasts

• Unchanged.

Rating

BUY

Positives

• : 1) Strong earnings growth; 2) Market leader underthe 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

• TP remained unchanged at RM2.00 based on 18x FY3/16 EPS (still a 20% discount to regional peers). Maintain BUY.

Source: Hong Leong Investment Bank Research - 13 Mar 2015