Results

• Within Expectations – Reported 1HFY16 PATAMI of RM22.84m came in within expectations, accounting for 52.6% and 48.4% of ours and consensus estimates.

Deviations

• None.

Dividends

• None.

Highlights

• Café outlet: YTD revenues declined by 11.5% yoy on the back of what we believe to be lower patronage by consumers in their domestic café chains. Of the 242 café outlets that OldTown operates globally, 210 or circa 87% of those outlets are located in Malaysia, which is still facing low consumer confidence. Subsequently, YTD PBT declined by 29% yoy as a result of lower economies of scale.

• The number of outlets remained flat (Avg. 241 outlets in 1HF15 vs. Avg. 241 outlets in 1HF16). Revenue per outlet declined 12% yoy. On a qoq basis, gross margins improved slightly by 1.89ppt on the back of streamlining menu offerings.

• The group remains optimistic with its expansionary plans in Malaysia, Singapore and Indonesia. As for the China market, the group is expecting to proceed with its relaunch in 3Q16. Despite the hiccups in its forays into the China market, its optimism stems from the growing disposable income and large population base.

• FMCG: Continues to offset the drag in earnings from the Café chain operations. YTD revenues registered an increase of 11% yoy. PBT experienced an increase of 17% yoy, mainly attributed to higher export sales generated during the period. Furthermore, the segment benefited from higher foreign exchange translation yoy as its exports are priced in USD and SGD.

• The resilience of the FMCG segment can be attributed to, amongst others, the group gaining control of the distribution channels in China and its aggressive multi-platform marketing overseas. The segments gross margins gained 4ppts qoq.

Risks

• Relatively elastic demand.
• Quality of food and services.
• Low consumer sentiment in the primary domestic market.
• Rising raw material prices.

Forecasts

• Unchanged pending more information during analyst briefing later today.

Rating

BUY Positives

• Market leader under the white coffee business;
• Decent dividend policy for a newly listed company; and
• Resilient earnings and low capex requirements. Negatives
• Competitive industry with low barriers of entry; and
• Global economic slowdown could jeopardize group’s sales and earnings.

Valuation

• Maintain BUY. TP of RM1.53 pegged to unchanged P/E multiple of 15.1x based on FY3/17 EPS or circa 20% discount to regional peers’ average of 20.5x (which are much larger in terms of market cap).

Source: Hong Leong Investment Bank Research - 26 Nov 2015