Highlights

• F&B: Despite signs of qoq improvement (revenue: +3.5%; normalized PBT: +6.9%) we still expect the F&B segment remaining pressured in FY17 given the subdued consumer sentiments. The recently recovered consumer sentiments index to 9.1pts in 1Q16 is still below the threshold level.

• As at FY16, there are 244 outlets operating in total (4QFY15: 245 stores). In FY17 we don’t foresee the number of stores increasing from the current levels as we expect Oldtown to merely replace non-performing stores with new stores.

• Their “Low Price Strategy” is expected to carry through into FY17 with the strategy soon to be introduced in Singapore. This will be supplemented by pricing and promotional activities to increase the customer count and visitations.

• Their re-entry into China is expected in the near term. We understand that the finalization of their strategy for F&B in China is taking form. We can expect an announcement to come in the next 30-60 days.

• We continue to expect the F&B space to remain challenging in 1HFY17 before a gradual recovery in 2HF17.

• FMCG: E-commerce and social media channels have proven to be a winner. Platforms such as Tmall have been the main drivers of sales in China, with the split being 80:20 ecommerce vs. traditional channel sales in FY16. To date 88 online stores carry their products, whilst management is targeting a further 80 stores in FY17.

• Other key markets (HK, Singapore & Taiwan) remain resilient. The latest market share data indicates that OldTown has gained or maintained its market shares in FY16.

• Despite the price of Robusta coffee beans and sugar being on an uptrend, management has moved to lock prices in for FY17; as such we don’t anticipate significant cost increases .

• We expect the FMCG to remain resilient, on the back of improved distribution, pricing and promotions across all key markets and higher shipments to China on the back of normalization of distribution in the coming quarters.

Risks

• Domestically, risks to this stock stems from the persistently low consumer sentiments which affects scalability of its F&B operations. For the FMCG segment, risk stems from import bans or changes in regulatory requirements.

Forecasts

• We upgrade our forecasts to reflect stronger contributions from the FMCG business moving forward. Our FY17 EPS is raised by 8%. We introduce FY18 numbers.

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

• Upgrade to a BUY with TP of RM1.83 based on P/E multiple of 15.2x based on FY3/18 EPS or circa 25% discount to regional peers’ average of 20.2x (which are much larger in terms of market cap)

Source: Hong Leong Investment Bank Research - 30 May 2016