Highlights

• F&B: As at FY2015, there are 245 outlets operating in total (FY2014: 238 stores). Moving forward, Oldtown plans to open 27 more new stores across its participating markets in FY16, which is fundamental to its topline growth moving ahead. To note, Oldtown’s maiden outlet in Australia is scheduled to commence operations in June 15.

• Oldtown aims to build long-term brand loyalty through their incorporation with the Boboiboy brand. This is part of their strategy moving forward, increasing their affinity with families and kids.

• Going forward, expansion plans in the Malaysian market would be focusing on “Basic” outlets, with 10 new outlets targeted for opening in FY16. The segment’s outlook is expected to remain soft in FY16 due to the dampened consumer sentiment post-GST implementation.

• FMCG: Yoy FY15 FMCG revenue grew 3.2% on the back of strong performance in the Singapore and Taiwan market, as well as stronger demand from modern trade in the domestic market, on the back of improved distribution after the realignment of distributors’ coverage.

• Demand for white coffee remains strong regionally, maintaining its strong market position in Hong Kong, Singapore and Malaysia. In terms of market share in the coffee mix segment, Oldtown has maintained second position in the above markets with market share of ~15% in Malaysia, 23% in Hong Kong and 15% in Singapore.

• Management guided that they have successfully renewed their raw materials procurement contracts, with coffee prices for FY16 to be maintained whilst the procurement price of non-dairy creamer reduced by 3-5%.

• Moving forward, we believe Oldtown’s FMCG domestic sales would subside slightly in FY16 due to soft consumer sentiment. However we expect the group to make advances in their export sales, especially in the Chinese domestic market following their distribution rationalization exercise in the China.

Risks

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

Forecasts

• FY3/16-17 EPS is reduced by 5-6% to reflect lower contribution from domestic cafe chain and FMCG segment.

Rating

HOLD 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

• Maintain BUY with slightly lower TP of RM1.85 (from RM2.00) as we decrease our PE multiple to 17.5x based on FY3/15 EPS circa 20% discount to regional peers’ average of 21.8x (which are much larger in terms of market cap)

Source: Hong Leong Investment Bank Research - 29 May 2015