Oldtown's annualized 1QFY12 earnings beat consensus and our estimates, largely attributed to lower advertising and promotion expenses, boosted by the holidays and festive season in 1Q12. However, we expect earnings to be weaker sequentially as the group ramps up advertising and promotional expenditure to boost sales in the next two quarters. We reiterate our BUY recommendation on Oldtown, premised on the group's consistent earnings growth. As we roll over our valuations to its 12-month forward earnings, we revise upwards our fair value (FV) from RM1.55 to RM1.66. Maintain BUY.
Better margins q-o-q.Oldtown's annualized 1QFY12 earnings beat consensus and our estimates by 10.7% and 16.1% respectively. Headline earnings jumped 34.5% q-o-q due to significantly lower-than-expected selling and distribution expenses (-47% q-o-q) as well as lower administrative and general expenses (-7.2% q-o-q). Gross profit margin dipped 2.1% to 33.1% compared with that in the preceding quarter while EBIT margin edged up 7.3% q-o-q. While growth of its fast moving consumer goods (FMCG) business remained strong, we also understand that its FMCG operations had reached full capacity. Hence, until its new factory is ready, we forecast that the revenue contribution from this business would come in at no more than 40% of total revenue this year. Since the group was listed in July last year, there are no comparable figures for the preceding corresponding quarter ended 31 Mar 2011.
Margins to normalize as A&P expenses creep up. On a sequential basis, PBT at Oldtown's FMCG business expanded 29.9% q-o-q on the back of a 1.0% dip in revenue q-o-q. Meanwhile, revenue and PBT at its food and beverage (F&B) division dipped 6.4% and 4.1% q-o-q respectively due to the slower rollout of Oldtown franchise outlets, which led to lower franchise fees and sales of furniture and utensils. In 1Q12, margins were robust owing to the positive effects of the festive season, which also meant that there was a less pressing need for A&P activities. We think that the group's earnings should normalize in the next two quarters as management would be incurring higher A&P expenses as it spurs sales in the traditionally weaker 2Q and 3Q this year.
Maintain BUY. We are reiterating our BUY recommendation on Oldtown, premised on its consistent top- and bottom-line growth. We maintain our earnings forecast for FY12 but move up our FV from RM1.55 to RM1.66 as we roll over our valuations to Oldtown's 12-month forward earnings. The stock's key-rerating catalysts are: i) obtaining 'halal' certification from JAKIM to penetrate the Muslim market, ii) stronger-than-expected rollout of its outlets, and iii) better than expected margins due to cheaper raw materials cost.