We attended Oldtown’s briefing and visited their new plant in Ipoh last week. The meeting was served to re-introduce and update their businesses, especially their new plant, to the investment community. Turnout was extremely encouraging with >40pax participants. We also gather that management is still confident and committed in its effort to grow the company amidst the promising outlook for both the café and beverage manufacturing businesses as it plans to (i) penetrate its instant coffee products into more 2-tier cities in China, (ii) accelerate outlets expansion in southern China after outsourcing food supply to a local licensed food processing, and (iii) diversify the F&B business to tap on different types of consumers in the local market. Reflecting its continuing positive prospects, we are thus maintaining our Oldtown’s net profit forecasts of RM48m and RM61m for FY14E and FY15E, respectively. We also reiterate our MARKET PERFORM call on Oldtown due to its rich valuation. Our TP of RM2.67 (postbonus RM2.14) is based on an unchanged PER of 16.7x over its CY14E EPS of 16.0sen.

Lucrative business. Fast -moving consumer goods (FMCG) segment has been growing strongly at an approximately 20% growth rate per annum. We have seen export contribution improved over the years from 36.0% in FY07 to 56.5% for 1HFY14. The better performances are now from China, Hong Kong and Singapore, which cumulatively contributed about 80% of exports’ sales. China exports are growing at high double-digit. One of the main reasons is Oldtown has recently acquired 70% of its FMCG distributors in Hong Kong, which already penetrated Shanghai, Beijing, Guangzhou and Shenzhen while 2013-14 focus will be on the tier 2 cities such as Tianjin, Shenyang, Suzhou, Hangzhou and etc. Hence, we reckon that growth from these areas seems promising. Besides, the management also anticipates strong demand from the China market. As such, they are seeking more potential distributors in the different provinces to improve its market shares and sales together with the brand building through the operation of Café chain stores.

New factory in town to spur growth. We have just visited the new plant in Tasek Industrial Park, Ipoh, which sees multiple-folds in land size and build-up area as compared to the older ones. The new buildings were constructed with green featureswhile the manufacturing machines have better productivity. The company installed Guerin System, which uses Paddle Mixer with higher capacity of 500kg per batch (320kg previously) and takes a shorter mixing time of 7 minutes per batch (vs. 25 minutes per batch previously). Hence, the current capacity can produce up to 24k MT per annum. However, the capacity is currently limited at 9500 MT as there are only 6 units of 6-lane packing machines at the moment. As demand increases, the company has planned and will continue to expand further because the new building still has extra floor space for future expansion. Hence, we expect the segment to continue playing an important role for future growth.

Charging ahead with China expansion. Oldtown has appointed a local licensed food-processing centre (April Eight (Guangzhou) Ltd) to produce core pastes and sauces for Oldtown café outlets in Guandong Province. The news comes as a sweetener and portrays the initial plan remains intact and the management emphasises that they will continue its expansion plan in southern China to meet the target of 18 outlets opening by end-CY14. Thus far, they achieved 4 licensed outlets opening. The trial production was completed with satisfactory results achieved and the supply to all outlets in the region is expected to commence in 1QCY14. Meanwhile, Oldtown is also exploring to form partnership with the existing owners of April Eight, which the company believes it will have a better control in the manufacturing of the products in the long run and avoid the complications encountered by setting up a new JV-food processing centre there. Based on our back-of-the-envelope calculation with an assumption of 18 new outlets by 2014, we expect the profit contribution to remain minimal at approximately 1.2% to the group’s net profit for the year. However, we reckon that the growth could be tremendous in the future when the number of outlets growing big in the region.

Source: Kenanga