Highlights

• OldTown signed an Area Licensing Agreement with Nikmat Mujur Sdn Bhd to expand its café operations to Yangon, Myanmar, with a view to becoming a fully-fledged Master Licensing Agreement to expand its network of cafes across Myanmar.
• Under the agreement, Nikmat Mujur will hold an exclusive licence to operate three outlets in Yangon for 24 months and will also have a non-exclusive right to use the OldTown White Coffee trade name and trade mark, to operate the system, to sell the approved products and provide specialised services within Yangon. The pilot outlet is expected to be operational within nine months.
• Should Nikmat Mujur wish to operate more outlets (in addition to the agreed three outlets) during this 24 month period, Nikmat Mujur will be granted a Master License to operate outlets and sub-license outlets within Yangon or the entire Myanmar.
• As part of the agreement, Nikmat Mujur will pay OldTown an Area License fee for the initial three outlets of USD120,000 (~RM0.5m).
• The term of the agreement is for five years, with an option to renew for another five years. Should the agreement be extended for a further five years, Nikmat Mujur will pay Oldtown a renewal license fee of USD60,000.
• Additionally, Nikmat Mujur will pay Oldtown USD20,000 ‘Pre- opening support fee’ per outlet opening as well as USD1,500 royalty per outlet per month. These fees apply to both the stipulated three outlets under the area licensing agreement as well as the potential further outlet openings, should Nikmat Mujur wish to open further outlets.

Risks

• Relatively elastic demand.
• Low consumer sentiment in the primary domestic market.
• Rising raw material prices.
• Occurrence of Ringgit strengthening would impact exports.

Forecasts

• While we are positive on the latest development (as Oldtown continues to expand its regional presence which is expected to add to the group’s earnings in future), impact is minimal (less than 1% of earnings). Hence, we are leaving our earnings forecasts unchanged.

Rating

(HOLD; TP 2.09)

• OldTown poses a loyal customer base domestically, exemplified by its status at the market leader in white coffee. Its foray into ASEAN and China also provide potential room for growth going forward. However, escalating raw material and labour costs going forward will cause margin pressure.

Valuation

• We maintain our BUY call with an unchanged TP of RM2.09 based on a P/E multiple of 16.8x based on FY18 EPS.

Source: Hong Leong Investment Bank Research - 13 Feb 2017