Period  2Q14/1H14

Actual vs. Expectations Oldtown recorded 1H14 net profit (NP) of RM23.6m which is slightly below the street and our estimates, at c.44% of the full-year forecasts of RM54.0m and RM53.8m, respectively. The lower-than-expected result was due to higher cost incurred in its café business.

Dividends  No dividend was declared for the quarter.

Key Result Highlights QoQ, the 2Q14 revenue was up by only 4.4% where a 15.4% increase in sales from its beverage manufacturing (“BM”) division helped to cushion a 3.8% QoQ decline in its café chain operations (“CC”). However, PBT declined marginally for the second consecutive quarter by 1.6% QoQ due mainly to a drastic margin compression in CC (-8.2ppt QoQ) despite a huge margin expansion in BM (+6.5ppt QoQ). The PBT of CC declined by 50.2% QoQ was due to: (i) a

3.8% decline in revenue, (ii) higher advertising and promotion fees, (iii) higher selling and distribution expenses in foreign subsidiary, and (iv) lower share of associates’ profits. However, the decline was cushioned by a 57.4% QoQ improvement in BM’s PBT, which was driven by export sales and profit contribution from the Hong Kong subsidiary that was acquired in April this year. The higher tax bracket of 21.1% vs 20.6% in 1Q14 also further dragged down the NP in 2Q14 by 6.6% QoQ.

 YoY, 2Q14 and 1H14 revenue improved by 14.8% and 10.8%, respectively, owing to better BM revenue (+32.4% YoY and +22.8% YoY respectively for 2Q14 and 1H14). However, PBT and NP growths were flattish for both 2Q14 and 1H14. Despite the sterling doubledigit earnings growth registered by BM YoY, it was insufficient to mitigate the decline in CC. The decline in CC was mainly due to the same reasons mentioned above and on higher operating costs resulting from the minimum wage ruling for foreign workers in Malaysia.

Outlook  Oldtown’s prospects remain positive backed by two key drivers, i.e. (i) the strong growth of its FMCG segment, which is expected to be boosted by its growing regional market share, including in untapped markets in China, South Korea and Vietnam, and (ii) possible opening of more outlets in Malaysia, Singapore, Indonesia and China. However, we remain cautious on the margins, pending management guidance.

Change to Forecasts  Due to higher costs incurred for CC division, we have cut our FY14E and FY15E net profits by 10% and 6% from RM53.8m and RM65.4m to RM48.5m and RM61.2m, respectively.

Rating Maintained MARKET PERFORM

Valuation  We have rolled forward our valuation to CY14E (from FY14E previously). Hence, our new TP is raised from

RM2.53 (post-bonus RM2.02) to RM2.67 (post-bonus RM2.14) based on 16.7x PER on CY14E EPS of 16.0sen (17.1x PER previously) (see overleaf for details).

Risks to Our Call  Global economic uncertainty may impact consumer spending which will consequently affect the company’s earnings prospects.

Source: Kenanga