Highlights

FMCG Outlook:

• Strong export growth: We expect FMCG segment’s strong exports growth momentum to sustain into FY17, buoyed by strong China sales (which sales accounted for 45% of the FMCG segment and grew 43% in 9M17).

• China: Management guided for a double-digit sales growth (high-teens) in China, supported by its strong network in China (with over 100 online retailers including Taobao, JD and TMall, which accounts for 80% of sales in China) and aggressive advertising expenditure. Sales growth aside, we note that online sales generally command better profitability (10% higher) relative to physical sales.

F&B Outlook:

• Light at the end of tunnel: Following its rationalizing exercise (by closing down non-performing outlets) since 3QFY16 (in view of the declining F&B revenue/outlet, see Figure 1), we believe the worst for Oldtown’s F&B segment is over, as revenue/outlet has shown 2 consecutive quarters of positive yoy growth since 2QFY17 (see Figure 1&2). Management guided that it is planning to open 3 outlets in 4Q17 (and given the lesson learnt in the past), we believe the opening of 3 new outlets will aid Oldtown in registering revenue growth in the near term.

• Moving forward, growth from the F&B segment will be driven by the ASEAN region and greater China (through territorial licensing agreements). The group is planning to replicate its business model in Myanmar to Vietnam, Cambodia, China, Hong Kong and Macau in the near future (by as early as 4QFY17). We expect Oldtown to continue to make headway in Asia (ASEAN, China and Taiwan) to exploit the region’s enormous potential and growing middle class amongst the urban population.

Risks

• Relatively elastic demand.

• Rising raw material prices.

• Occurrence of Ringgit strengthening would impact exports.

Forecasts

• Unchanged.

Rating

(BUY ↔ ; TP 2.36)

• While Oldtown’s domestic café and FMCG sales remain stagnant, FMCG exports are accelerating at a rapid pace which will provide significant revenue contributions for the group going forward.

Valuation

• Maintain our BUY call with an unchanged TP of RM2.36 based on a P/E multiple of 17x on FY18 EPS.

Source: Hong Leong Investment Bank Research - 24 Feb 2017