Journey to Wealth
Oldtown - New central kitchen in China
News As expected, Oldtown has announced a shareholder agreement with Year Full Group Limited (YG), which operates the "OLDTOWN WHITE COFFEE" licensed restaurant in the territory of Guangdong, China, for the establishment of a 51:49 joint venture (JV) company in Hong Kong.
The JV company will mainly be involved in the setting up of a Central Kitchen business to support the development and expansion of its licensed outlets in the territory of South China.
Comments The investment cost of HKD5.1m or RM2.0m for the 51% equity will not have any material impact to Oldtown's balance sheet as the company has a net cash position of RM64m as at Sep 2012. The investment cost above is thus less than 1% of its net cash.
The set-up will help to smooth the flow of supply of ingredients to its China's outlets, where the company is planning to expand its outlets to more Tier-One cities in China. The company has an ambition to open 10 outlets per annum in the region.
Given the well-received response from customers to its first few outlets in Guangdong, we believe the company's outlets in China will eventually contribute positively to the company in the longer term.
Outlook Oldtown's prospects remain positive with two key drivers i.e. 1) the strong growth of its FMCG segment, which is expected to be boosted by its growing regional market share, including that of untapped markets in China, South Korea and Vietnam and 2) the likely opening of more outlets in Malaysia, Singapore, Indonesia and China.
Forecast Our earnings estimates are maintained for now. The company's next quarterly results will likely be announced on 27 Feb 2013.
Rating Maintain OUTPERFORM.
Valuation Based on an unchanged targeted PER of 14.5x on the FY14 EPS of 16.5 sen, our fair value is maintained at RM2.40.
Risks The global economic uncertainties may impact consumers spending, leading to a drop in overall demand and a slowdown in its outlet expansion momentum.
Source: Kenanga
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