Oldtown's 9MFY12 earnings beat expectations, accounting for 80.2% of our and 78.1% of consensus' full-year  estimates  based  on  FYE  Dec  forecast.  The  better-than-expected  results  were  due  to  the  resilience  in  its  FMCG  business,  which offset weaker earnings from F&B. The group declared a first interim dividend of 6 sen.  We  reaffirm  our  positive  view  on  the  stock  and  value  the  company  at  15x FYE13  EPS.  However,  we  are  revising  higher  our  FV  to  RM2.60  as  we  tweak  our forecasts to reflect the change in the group's FYE from December to March. Maintain BUY.

Better  than  expected.  Oldtown's 9MFY12 core net profit was above expectations, accounting for 80.2% of our and 78.1% of consensus' full-year  estimates.  The  better-than-expected  earnings  were  due  to  resilient  profit  before  tax  from  its  fast  moving consumer  goods  (FMCG)  business,  which  grew  marginally by  1.4%  q-o-q.  This  helped to offset the sequential 12.0% drop in profit before tax (as shown in Figure 3) at the food and  beverage  (F&B)  segment.  The  weaker  earnings  from  its  F&B  division  were attributable to slower sales during the Ramadan month in 3Q, during which earnings are seasonally  the  weakest  for  F&B.  Gross  margins  remained  stable  at  31.9%  this  year compared with 32.0% over the corresponding period last year, probably due to: i) stable coffee  prices  throughout  the  year,  and  ii) management's successful marketing efforts, which did not involve sacrificing margins in order to stimulate sales.

FMCG sales outpace F&B sales YTD. On a YTD basis, FMCG sales grew 24.4% y-o-y while  F&B  sales  jumped  19.8%  y-o-y  as  export  sales  continued  to  outperform  sales  to the  domestic  market.  This  reaffirms  our  view  that  the  stock's main  catalyst  lies  with  its FMCG business. We are of the view that the group's exports will see significant growth next year once its new factory in China commences operation.

Paying its first dividend for this FY. The group has declared an interim dividend of 6.0 sen  per  share  compared  with  2.5  sen  per  share  during  the  corresponding  period  last year. The group's balance sheet remains sturdy as it is in a net cash position.

Maintain  BUY. With  the  exit  of  KFC  and  QSR from  the  local  bourse by  the  end  of  the year,  we  continue  to  like  Oldtown  for  exposure  in  the  F&B  sector.  This  is  premised  on the  group's  consistent  top-  and  bottom-line  expansion  and  potential  growth  in  its
overseas  business. We  are  taking  the  opportunity  to  tweak  our  forecasts  to  reflect  the change in the group's FYE from December to March. Hence, we are revising upwards our fair value (FV) to RM2.60 as we peg the stock to 15x FYE13 EPS.

Quarterly dip in F&B revenue within expectations. As shown in Figure 1, F&B revenue dipped 3.8% q-o-q  while  FMCG  revenue ticked  down  by  1.1%  q-o-q.  Despite  registering  a  marginal  1.1%  dip  in  revenue, profit from FMCG grew 1.4% due to better margins this quarter while profit from the F&B business shrank by  12.0%  y-o-y.  We  are  not  surprised  with  the  poorer  performance  from  its  F&B  business  as  3Q  is seasonally the weakest quarter as it coincides with the Ramadan month. 

Exports lift FMCG sales. We continue to favour Oldtown's FMCG business, whose revenue surged 24.4%y-o-y  (compared  with  a  19.8%  y-o-y growth from the group's F&B business) as exports continued tooutperform domestic sales. This reinforces our view that the stock's main catalyst lies in its FMCGbusiness. We expect the group's exports to grow significantly  next  year  once  its  new  factory  in  Chinacommences operation.

Outlets  expansion  intact.  Oldtown  added  six  new  outlets  to  its  portfolio,  bringing  the  total  number  of outlets to 213 (11 in Malaysia, 1 in Singapore, 3 in Indonesia and 2 in China) as at 3Q12 compared to 196 as  at  end-FY11.  We  are  making  no  changes  to  our  previous  forecasts  as  we  believe  that  the  company should be able to open nine more outlets by the end of this quarter, boosting the total to 221 outlets.

First 'Newly Designed Signature Outlet' debuts in Mid Valley. Besides launching its first kiosk outlet in KLCC recently, the group opened its first newly designed signature outlet in Mid Valley Megamall today. We understand that the outlet, located on the third floor near the convention centre, is relatively small in size but embodies the 'tradition meets modern' appeal. With Mid Valley Megamall attracting some 30m-33m visitors annually  (based  on  CBRE  Research  estimates),  we  think  this  Oldtown  outlet  will  be  profitable  as  it  would benefit from the mall's success in attracting and retaining shoppers.

Maintain BUY. All in all, we reiterate our BUY recommendation on Oldtown, premised on its consistent top- and bottom-line growth. We value the stock at RM2.60, pegged to 15x FYE13 EPS. That said, we believe the  stock  could  rerate  to  17x-18x  forward  earnings  next  year  if  the  company  can  translate  overseas expansion strategy into profits.
 

 Source: OSK