Period  4Q14/ FY14

Actual vs. Expectations In line. FY14 net profit came in at RM48.9m which accounted for 101% and 97% of our forecast and consensus estimates, respectively.

Dividends  A final interim single-tier dividend of 3.0 sen was declared for the quarter, below our expected dividend of 5.5 sen and consensus dividend expectation of 6.1 sen. This translates into a lower dividend yield of 1.4% (compared to 2.9% in FY13).

 We believe the reason behind the lower dividend is higher operating costs arising from: (i) implementation of minimum wage and (ii) higher electricity tariffs in January 2014.

 Thus, we revise downward our dividend payout assumption to 30% (from 60% previously). Accordingly, we expect FY15 total dividend to be 4.0 sen which implies a dividend yield of 1.9%.

Key Result Highlights  In FY14, net profit rose 9% to RM48.9m with a large 35% increase in the beverage manufacturing (BM) sector while Café Chain Operations (CC) declined 7% to RM31.3m. The BM segment benefited from the 11-month profit contribution from their newly acquired foreign subsidiary, which is the sole distributor of Oldtown beverage products in Hong Kong. In the CC segment, PBT margin declined to 15% from 17% on higher costs arising from the minimum wage ruling which affected salaries for both local and foreign workers.

 QoQ, 4Q14 net profit decreased by 11% to RM11.9m. While operating margins remained unchanged at 18%, OLDTOWN’s effective tax rate rose from 24% to 30% leading to a 20% increase in taxes to RM5.2m. The tax increase was due to lower drawdown of their reinvestment allowance which had previously offset part of the company’s tax expenses. The BM segment recorded a 30% decline in PBT to RM7.3m on lower domestic sales and exports. Furthermore, amortization of intangible assets increased from RM0.6m to RM1.8m post acquisition of a foreign distribution network which was classified under the BM segment. This was offset by a 24% increase in the CC segment to RM10.1m on lower advertising and promotion fees charged out.

Outlook  Prospects remain positive backed by two key drivers, namely (i) the strong growth of its BM segment, which is expected to be boosted by its growing regional market share, including the relatively untapped markets in China, South Korea and Vietnam, and (ii) opening of more outlets in Malaysia, Singapore, Indonesia, China and recently, Australia.

 However, the sharp decrease in dividend may not bode well for OLDTOWN’s share price.

Change to Forecasts No changes to our FY15E net profit estimate of RM61.2m. At the same time we introduce our FY16E earnings forecast of RM77.0m, with an expected growth of 10%. We have imputed into our FY16E forecast a higher number of new outlet openings overseas with the recently announced Australian licensing deal.

Rating Maintain MARKET PERFORM.

Our latest TP of RM2.25 reflects a total return of 9.1% (upside 7.1%, dividend yield 1.9%). OLDTOWN’s good growth prospects internationally may be tempered by softer consumer sentiment in the near-term due to higher living costs. Thus, we maintain our MARKET PERFORM rating with a total return of less than 10%.

Valuation  Upgraded TP to RM2.25 (from RM2.14 previously), after rolling over our valuation base year to FY15 with an unchanged targeted PER of 16.7x.

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

Source: Kenanga