ACL Acquisition

News

• ACL is principally involved in the trading and distribution of coffee products in Hong Kong, Macau and Guangdong, PRC.

• The acquisition is positive to earnings, as an extra 30% of the ACL’s earnings would be contributed to PATAMI, it also eliminates leakage of earnings via the elimination of MI from a profitable subsidiary.

• Based on our calculations from the filing disclosure, ACL’s FY15 PAT stands at circa RM5.6m, assuming that FY16 PAT remains constant, we would see an increase of RM1.69m (30% of RM5.6m) or 3.4% to Oldtowns FY16 PATAMI and beyond.

• Our current projected FY3/16 EPS stands at 10.6 sen, post acquisition, this should increase by circa 1% to 10.7 sen. Furthermore, the acquisition valuation of 9.2x P/E implies a 61% discount to the Oldtown’s current P/E of 15.1x, which is earning accretive. 

Pros / Cons

• We are positive on this acquisition, as it will give Oldtown complete control of ACL Group’s operations, thus allowing it to dictate the marketing and distribution plans as well as setting its future strategic directions for the Hong Kong and Greater China region. We see this as an extension of the group’s consolidation of its distributions network and channels in the Chinese market. This is in line with the group’s strategy to grow its FMCG segment sales in the region.

• Although China’s economy is going through a slowdown, there is still ample opportunity for the group as it is by and large a huge market; as such there is still ample room for the group to grow in China over the long term.

Risks

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

Forecasts

• FY16-17 EPS increased by 1% to take into account total contribution of ACL Group to Oldtowns FY16-17 PATAMI.

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 jeopardize group’s sales and earnings.

Valuation

• Maintain BUY while TP increased slightly to RM1.87 (From RM1.85) based on unchanged P/E multiple of 17.5x  FY3/16 EPS.