News    Old Town (M) (“OTM”), a wholly-owned subsidiary of the company, has entered into a Sale and Purchase Agreement for shares with Nelson Chan, Law Cho Hong and Lee Siu Chung to acquire 1.4m shares or 70% of Advanced City Ltd (“ACL”), a 16-year old coffee products trader and distributor in Hong Kong, Macau and Guangdong, China, for an aggregate value of HKD67m or RM26.4m.

Comments     We are positive on the news as the acquisition will enable the group to take control of the operation and maximise the sales potential through its existing 2,400 distribution points in the region.

We view the purchase price as fair as Oldtown is buying only at a PER of 6.7x for the acquisition based on FY12 unaudited PAT. This valuation is also relatively lower than DKSH’s current market PER of 7.0x (DKSH is a leading market expansion services group with a focus on Asia and has the value chain from sourcing, research & analysis, marketing, sales, distribution and logistics to after-sales services. DKSH also distributes and sells Oldtown’s products in a few countries such as Malaysia, Singapore, Taiwan and etc.).

We also reckon that the group has no issues with the payment as the acquisition will be funded by the RM64m proceeds raised from its private placement exercise in Dec 2012.

Based on its latest FY12 results, ACL’s HKD14.2m or approximately RM5.6m in net profit will contribute RM3.9m to Oldtown, which is about 8.8% of its CY12E earnings. Based on our back-of-the-envelope calculation, we reckon that the CY12 PBT margin for the FMCG segment will be improved by 3ppts. As such, the acquisition, which is expected to be completed by 3QCY13, should enhance the group’s profit margin from FY14 onwards.

Outlook     This acquisition will enhance Oldtown’s future earnings outlook by improving its FMCG profit margin as the group will now have the exposure to the full value chain from manufacturing to marketing and sales in the China region. This will support the group’s aim to continuously grow its profit contribution from China.

Forecast     We are maintaining our FY13E earnings at RM45.4m but are revising our FY14E earnings estimates slightly higher from RM50.3m to RM53.8 for FY14E. The full impact from the acquisition will stream in from FY15E onwards.

Rating     Maintain OUTPERFORM

Valuation        In line with the rise in our FY14E earnings, we have revised our TP higher to RM2.53 (from RM2.38 previously), based on an unchanged PER of 17.1x over the FY14 EPS. Our applied PER is based on a +1.5SD level above the company’s average PER of 12.6x since listing.

Risks     The global economic uncertainty may impact consumer spending, which will consequently affect the group’s profits.

Source: Kenanga