Highlights

• F&B: As at 2QFY16, there are 242 outlets operating in total (1QFY16: 241 stores).Throughout 1HFY16 there were 11 new openings and 16 closures and renovations. Of the 242 stores 87% are located in Malaysia.

• PBT jumped 21% qoq on the back improved share of profits from its Singapore café outlets despite a marginal increase of 1% in revenues qoq. There are currently 9 café outlets in Singapore with 2 more slated to commence operations by end FY16.

• The groups’ promotional activities have centered on value inducing purchases such as their “RM10 value meals” promotions. Moving into 2HFY16, its value inducing pricing strategy and discounting is expected to persist to attract customers. YTD revenues per outlet are down circa 12% on a yoy basis.

• We continue to expect the F&B space to remain challenging due to the dampened consumer sentiment post-GST implementation and series of administered price hikes.

• FMCG: We expect the FMCG exports to continue to grow from the current 41% of segment revenues, on the back of improved distribution and pricing strategy across all key markets.

• Yoy 1HFY16 revenues grew by 11.1% on the back of double digit growth in modern trade in the 3 key markets (Malaysia, Hong Kong and Singapore). Taiwan has emerged as another key market for the group in recent times. PBT grew by 17% whilst margins expanded 110ppts yoy, aided by the stronger USD. Recall that their exports are priced in USD.

• Its exports to China registered a slight decline yoy on the back of their distribution rationalization; however this is not reflexive of a drop in demand for OTWC products. Walmart has been signed on as a key player in their modern trade channel. Walmart has 450 stores across China.

• Margins would be supported by prudent cost management, which saw packaging materials cost decrease by 8% yoy, meanwhile the full commissioning of the automation of their packaging line end 3QFY16 will reduce direct labor expenses in the long run.

Risks

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

Forecasts

• Unchanged.

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 jeopardize group’s sales and earnings.

Valuation

• Maintain BUY with TP of RM1.53 based on 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 - 27 Nov 2015