Highlights

• F&B: As at 1Q16, there are 241 outlets operating in total (1Q15: 238 stores). Oldtown’s maiden outlet in Melbourne, Australia, commenced operations on 16th June. Based on first month’s performance, the outlet should bring in AUD280- 300k revenue per month or roughly contributions from 6 local stores.

• Promotions will continue, in order to diversify it’s branding, OldTown has been working closely with Tiger Airways and Jetstar to tap into their customer base. Furthermore, the group has signed an exclusive agreement with “Select Service Partners”, an international F&B specialist for airports and transportation hubs, to develop OTWC outlets throughout the Asia Pacific region, with Changi Airport slated for before end-15 and HK airport slated for end-15.

• We expect F&B segment’s outlook to remain soft due to the dampened consumer sentiment post-GST

• FMCG: We expect FMCG revenue to be relatively stable, on the back of improved distribution after the realignment of distributors’ coverage post appointment of Yee Lee Trading as master distributor in peninsular Malaysia and the group taking full control of distribution and price strategy in China (SZOTWC).

• There was a slight increase of input costs (1% qoq). This is due to the RM depreciating 12% qoq; however, the group has locked raw mats prices for FY16, input costs are expected to remain relatively stable throughout. Furthermore, it has a natural hedge as all of its exports are priced in USD with the exception of Singapore, which is in SGD. Exports account for approximately 45% of FMCG revenues.

Risks

• 1) Relatively elastic demand; 2) Quality of food and services; and 3) Prolonged GST induced low consumer sentiment. 4) High Foreign Ownership

Forecasts

• FY3/16-17 EPS cut by 14-15% to reflect lower contribution from domestic cafe chain and higher A&P expenses to induce consumer to purchase.
• We adjusted our average revenue per store assumptions by 5% on the expectation of lower patronage throughout CY15.

Rating

• BUY
• Positives: 1) Market leader under the white coffee business; 2) Decent dividend policy and yield; 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

• Maintain BUY with lower TP of RM1.53 (from RM1.87) as we decrease our P/E multiple to 15.1x based on FY3/17 EPS or circa 20% discount to regional peers’ average of 19.8x (which are much larger in terms of market cap)

Source: Hong Leong Investment Bank Research - 1 Sep 2015