Stronger foreign shareholdings then before. Foreign fund shareholdings in the company has grown substantially since its listing, rising from only a 4.0% stake in February 2012 to 19.7% in September 2012 and now stands at a record high of 37%. The foreign shareholders are diverse and are from countries all over the world such as Hong Kong, US, Canada and etc. We believe this is one of the major factors that has been driving the stock to re-rate itself from a Fwd PER of 9.7x to 15.8x, leading the share price to surge 70.0% from last year. That said, the stock is still tightly held by the top 20 shareholders with an aggregate holding of 80.9%. Note that the risk of an exodus is now ironically high given its high foreign shareholdings and should foreign funds exit our market.

Lower outlet openings in FY12. Our conservative forecast of a total of 25 new outlet openings for 2012 was quite spotted on with the actual opening of 24 café outlets for the year. This was, however, actually lower than the company's initial target of 40 outlets. Nevertheless, we are not too concerned about this as it is better for the company to optimise the location of its existing outlets carefully rather than be fixated on an arbitrary number. We are also more interested in the company's regional outlets expansion, which should be given a boost by its China expansion after the commission of a centralized kitchen in the Guangdong province. Despite that, we remain conservative with our new café outlets estimate of just 27 for 2013 as compared to the ambitious management target of 40 to 54 outlets.

New capacity coming soon! Last year, Oldtown appointed more fast-moving consumer goods (FMCG) distributors, which helped it to maintain its market share and improved its sales here by 23.8% YoY in CY12 as compared to the lower revenue growth of 5.8% in its Café outlet division. The management sees lucrative demand globally, especially from the China market. Given that it has overrun the capacity of its manufacturing of instant coffee mix and instant milk tea mix, its upcoming new capacity in 2QCY13 should come in just in time to boost the capacity and growth.

Earnings estimates revised down on higher expenses. Fundamentally, we remain positive on the company given its two key drivers: 1) the strong growth of its FMCG which is expected to be boosted by its growing regional market share and 2) its vision of opening more café outlets regionally. Nevertheless, given the more competitive and challenging market, we have revised our earnings estimates lower due likely to higher operating/ marketing expenses to be incurred (to RM45m-RM50m for FY13-14E from RM52m-RM59m previously).

Downgrade to MARKET PERFORM with a revised TP of RM2.38. Our valuation is based on a PER of 17.2x (from 14.5x previously) over its FY14 EPS of 13.9 sen. Our applied PER is based on the +1.5SD to its average PER of 12.6x since listing. We have also done a regression analysis between Oldtown and its regional peers on comparison between market capitalisation and PER. The regression study suggests that at Oldtown's market cap of RM787.1m, it should deserve a PER of 17.1x, which is in line with our targeted PER of 17.2x above.

Source: Kenanga