Highlights

• F&B: As at 3QFY16, there were 245 outlets operating in total (2QFY16: 242 stores).Throughout 9MFY16 there were 12 new openings and 18 closures and renovations domestically. Of the 245 stores 86% are located in Malaysia.

• Grand and signature model stores are being replaced by basic model stores in an effort to streamline with the group’s current pricing, promotional and positioning in a subdued consumer sentiment environment. Their “Low Price Strategy” is expected to carry through into 1QFY17.

• Furthermore, the government’s decision to freeze foreign worker intake, along with the increase in minimum wage requirements has presented itself as a midterm challenge. This would add further margin pressures to the F&B segment. 70-80% of employees are foreign workers.

• We continue to expect the F&B space to remain challenging in the near term before a gradual recovery.

• FMCG: We expect the FMCG to remain resilient, on the back of improved distribution and pricing strategy across all key markets.

• YTD exports to China registered a decline of 40% yoy on the back of their distribution rationalization; however this is not reflexive of a drop in demand for OTWC products, rather a short-term hiccup whilst Oldtown takes control of their pricing in their biggest FMCG market. Exports to China are expected to normalize to FY14 level within FY17.

• Corporate activity. Management guided that given the strong balance sheet and cash position of the group (9MFY16: RM154.5m net cash), and having conceded that topline and bottomline growth has plateaued, the group is on the prowl for M&A activity that could complement their FMCG and or F&B business. We are neutral with a slight positive bias on this guidance.

• Special Dividend. Management also guided that the board is considering declaring a special dividend sometime in CY2016 to reward shareholders. Oldtown has a dividend payout policy of 50% and has paid above that threshold historically. To note, the RM154.5m net cash as at 3QFY16 translates to circa 34 sen/share.

Risks

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

Forecasts

• Unchanged.

Rating

HOLD 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 HOLD with unchanged 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 - 29 Feb 2016