Highlights

• We attended Oldtown’s FY17 briefing and walked away feeling neutral about the group’s prospects going forward. FMCG Outlook:
• Strong export growth: We expect FMCG segment’s strong exports growth momentum to sustain into FY18, buoyed by strong China sales (which sales accounted for 45% of the FMCG segment and grew 46% in FY17 yoy). Total exports in FY17 accounted for 65% of total FMCG sales in 2017 vs 59% in FY16 (+6% yoy) (Figure 1).
• Sales to countries excluding SEA and Greater China to continue growing: As shown in Figure 1, growth in “other” countries grew 25% yoy to 7% of total FMCG sales in FY17. This was mainly underpinned by strong growth in USA (+22%), Canada (+31%) and Australia (+43%). We expect growth in “other” countries to continue accelerating as the Oldtown products are being increasingly made available in supermarkets in the respective countries. F&B Outlook:
• Outlet openings on the horizon: Following its rationalizing exercise (by closing down non-performing outlets) since 3QFY16 (in view of the declining F&B revenue/outlet, see Figure 2), the group plans to open 8 new outlets in FY18 with more prudent location selection. We believe the opening of 3 new outlets will aid Oldtown in registering revenue growth in the near term.
• Since the expansion of the café division to Hong Kong, Jiangsu Province (China) and Myanmar late last year and early 2017, the group is planning to secure licensing area agreements in South East Asia and China going forward. Oldtown has already received a letter of Intent for licensing area agreements for 3 further provinces in China.

Risks

• Rising raw material prices.
• Occurrence of Ringgit strengthening would impact exports.

Forecasts

• We upgrade our FY18-20 net profit forecast marginally by 4-5%, to reflect rising contributions from China FMCG sales and further outlet openings in Malaysia.

Rating

(HOLD ↔; TP 2.75)

• Oldtown’s FMCG exports are accelerating at a rapid pace which will provide significant revenue contributions for the group going forward. Additionally, the opening of new café outlets domestically should take advantage of the recovering consumer sentiment. Despite this, we reckon growth prospects are already priced in at current levels.

Valuation

• Maintain our HOLD call with a higher TP of RM2.75 (from RM2.62) based on unchanged 17x on revised FY19 EPS.

Source: Hong Leong Investment Bank Research - 29 May 2017