Highlights

• Oldtown confirmed that an explosion had occurred at its central food processing centre in Subang, which had caused injury to several employees.
• The food processing operation at the plant has temporarily been halted and is expected to re-commence via auxiliary means in the shortest time possible in order to mitigate any supply disruption to F&B chain outlets.
• Nevertheless, Oldtown confirmed that the production of FMCG products is completely unaffected. Outlook:
• Outlet openings on the horizon: Following its rationalization exercise (by closing down non-performing outlets) since 3QFY16 (in view of the declining F&B revenue/outlet, see Figure 1), the group is exploring the possibility of a low cost concept F&B outlet which will focus on high volumes and low priced products.
• Since the expansion of the café division to Hong Kong, Jiangsu Province, Shanghai, Fujian (China) and Myanmar late last year and early 2017, the group is planning to secure more licensing agreements in other parts of the SEA region, with talks to enter Cambodia are already in motion.

Comments

• We expect the facility to return to regular operations very shortly and do not expect this incident to have a significant effect on café operations (as damages are adequately insured, pending the insurance company’s assessment).

Risks

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

Forecasts

• Maintained.

Rating

(HOLD ↔; TP 2.75)

• Oldtown’s FMCG exports to China are on track. The signing of Area Licensing Agreements across SEA and some regions of China will not have an immediate significant impact on short term earnings but could provide an avenue for growth in the long term.

Valuation

• Maintain our HOLD call with unchanged TP of RM2.75 based on a P/E multiple of 17x on FY19 EPS.

Source: Hong Leong Investment Bank Research - 25 Sep 2017