Highlights

• We attended Oldtown’s 1HFY18 briefing and walked away feeling positive about the group’s prospects going forward.

• Café Outlet Outlook: Domestically, the group plans to open low cost concept ‘On the Go’ outlets, which will focus on high volumes and low priced products. Internationally, we expect the number of Oldtown outlets to increase with the recently secured licensing agreements in certain provinces in China and SEA region. Nevertheless, earnings contribution from these regions will likely remain small vs. domestic market. Oldtown merely collects royalty payments from international branches. Following its rationalization exercise (by closing down non-performing outlets) since 3QFY16, we expect revenue/per outlet going forward to remain flat after numerous quarters of negative yoy growth (Figure 3).

• FMCG Outlook: Both domestic and international FMCG sales grew strongly in 1H18 (see Figure 1), mainly on the back of the strong growth registered in China (+77% yoy), which was in turn due to increased penetration on Alibaba and Tmall. Going forward, we expect strong FMCG revenue growth, as Oldtown guided that sales on 11/11 day alone this year has reached ~RMB10m (RM6.2m).

• Rising costs to be mitigated by better cost management. Despite raw material costs increasing by 6% in 1H18 (CPO, PKO, coffee powder), 1H17 PBT margin grew 0.6%-pts to 25.5% in 1HFY18. PBT margin is guided to remain encouraging in 2HFY18 as high raw material costs will be mitigated by better cost management.
• Shariah Status: As expected, Oldtown was reclassified as a Shariah-compliant security since 24 th Nov 2017.

Risks

• Rising raw material prices.

• Occurrence of Ringgit strengthening would impact exports.

Forecasts

• Raise our FY18/19/20 PATAMI forecasts by 7.2%/8.2%/9.1% to account for stronger FMCG export sales going forward.

Rating

• (BUY ; TP 2.91)

• We expect Oldtown’s FMCG exports (particularly to China) to be the main growth driver for Oldtown going forward. However, we expect earnings from Oldtown’s café business to remain flat as international ventures (recently signed Area Licensing Agreements in select areas of SEA and China) and low cost on the-go outlets domestically are still in early stages.

Valuation

• Post earnings revision and recent share price retreat, we raise our call from a Hold to a BUY with a higher TP of RM2.91 (from RM2.75) based on an unchanged 17x FY19 EPS of 17.1 sen.

Source: Hong Leong Investment Bank Research - 4 Dec 2017