Results

• OldTown’s 1QFY18 net earnings stood at RM16.7mil, increasing 20.0% y-o-y and 68.1% q-o q. Meanwhile, 1QFY18 revenue was at RM109.3mil, rising 6.2% y-o-y and 2.2% q-o-q.

• Within expectations - 1QFY18 net profit was within expectations by accounting for 24.1% and 23.7% of our and market consensus of full year earnings forecast respectively. The earnings driver was attributed to continued growth in its FMCG segment.

Comment

• Better earnings y-o-y…. Topline and bottomline for this quarter posted a positive growth of 6.2% and 20% respectively. The resilient performance is mainly attributed by F&B division with PBT jumped 49.08% yoy due to the write back of the provision of doubtful debts despite revenue was flat, +0.11%.

• ……as well as q-o-q. Meanwhile, 1QFY18 registered a strong earnings growth, +68.1% against last quarter. The strong performance posted by both divisions as F&B and FMCG supported the overall Group’s net profit. The stellar growth by FMCG segment was mainly due to the lower selling and distribution expenses incurred during the quarter while strong PBT registered for F&B was due to the write back of the provision of doubtful debts a mentioned earlier.

• FMCG division remained resilient. Another strong growth recorded by FMCG segment in this quarter for both its revenue and PBT against 4QFY17. The stellar performance attributable to its export sales on foreign exchange gains. The FMCG division registered positive growth of topline of +7.67% q-o-q and +11.11% y-o-y. Meanwhile the division’s PBT surged 34.41% q-o-q whilst a slight decline on y-o-y by 0.09% as affected by the foreign exchange losses.
  
  F&B division’s sales remained muted. In 1QFY18, F&B’s topline decreased by 4.6% q-o-q while flattish y-o-y, mainly due to weak consumer sentiment.
   
• Expansion plan moving forward. We reckon that the group will deliver a moderate growth going forward. The group has come out with various expansion plans for its F&B division to curb softer consumer sentiment and counter the stiff competition among F&B players as consumers will continue to seek for “value-for money” deals. The group has launched the HAPPY SAVERS set meals value in April 2017. The Group also targets media placement and communication strategy to create awareness of this value centric offering so as to cast a wider network and attract the consumers. Moreover, for FY18, the group plans to open more outlets in Malaysia which will still be centered on the traditional format “Generic” outlets. Besides, the Group will identify potential locations for the opening of low-cost model, known as OldTown White Coffee Basic which seems as a viable solution and a growth model. In addition, the group will continue to strengthen its brands in international markets by expanding the coverage of café chain outlets in Singapore, Indonesia, China and Australia. The latest “Basic” concept outlet has been opened in MidTown, Singapore in April 2017.
   
• On the other hand, the group will continue to increase its FMCG segment’s productivity and efficiency as well as maintain its strong brand presence in the domestic and international markets. The group expects strong growth driven by China, Australia, USA, Indonesia and Philippines. Also, the Group plans to incur more capital expenditure for the manufacturing facilities particularly in the automation to improve operational efficiency and drive cost savings.

Earnings Outlook/Revision

• No change to our earnings forecast for FY18-19F.

Valuation & Recommendation

• Maintain HOLD with an unchanged target price of RM2.83, based on 19x FY18 EPS forecast of 14.9 sen.

• We favour the group for its dominant position in the white coffee segment in particular on the growth of FMCG segment banking on great prospects in China market. However, considering the risk of weak domestic consumer sentiment and extremely competitive local retail market which will negatively impact its F&B segment, we retain our neutral stance on the stock.

Source: JF Apex Securities Research - 25 Aug 2017