Results

• In line. 1QFY18 core PATAMI of RM16.7m (+25.8% yoy, +71.7% qoq) came in within expectations, accounting for 24%-26% of consensus and our expectations.

Deviations

• Broadly in line.

Highlights

• Yoy: 1QFY18 revenue grew by 6.2% mainly from stronger FMCG sales to Greater China (+12%) and Malaysia (15%). Core PATAMI, on the other hand, rose 26% to RM16.7m due largely to RM3.1m doubtful debts write-back for the café chain operations.
• Qoq: 1QFY18 core PATAMI rose sharply by 72% to RM16.7m due mainly to: 1) RM3.1m doubtful debts write- back (vs a RM4.8m write-off in 4Q17) for the café chain operations; and (2) the absence of heavy marketing expenses (recall, Oldtown incurred heavy marketing expenses in 4QFY17 from sales activities in China for 11/11 day).
• FMCG: Sales to Greater China and Malaysia in 1QFY18 were the two strongest growth regions, growing 12% and 15% respectively yoy. Greater China now accounted for 44.6% of total FMCG sales up from 44% in 1QFY17. Oldtown also reported low sugar coffee products showed healthy growth across the board, indicating a change in consumer behavior globally.
• Café chain: In the absence of the aforementioned RM3.1m debt write back, café chain PBT in slumped 26% yoy as the popularity of Oldtown’s F&B outlets continues to wane. The group is looking to explore lower cost outlet business models going forward.
• Outlook: We expect Oldtown to continue to make headway in Greater China, particularly through its online sales platform to exploit the region’s enormous potential and growing middle class consumer amongst the urban population. While we do not expect Oldtown’s recently secured Licensing Area Agreements in some regions of China and SEA to have significant contributions in the short run, the venture could provide an avenue for growth in the long run.

Risks

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

Forecasts

• Unchanged pending briefing later today.

Rating

(HOLD ↔; TP 2.62)

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

Valuation

• Maintain our HOLD call with unchanged TP of RM2.62 based on a P/E multiple of 17x on FY19 EPS.

Source: Hong Leong Investment Bank Research - 25 Aug 2017