We attended OLDTOWN’s 1Q15 results briefing hosted by its management and came back feeling cautious on the outlook and prospect of the company. The FMCG business is getting tougher on the back of softer consumer sentiment and competition from both existing and new entrants, with the Group having to incur extra costs in the form of price discount in order to preserve its market share. Elsewhere, its Café Chain (CC) saw flattish growth in 1Q15, due to low same store sales growth (SSSG) as well as some temporary closures of certain outlets, while the expansion in China was halted as the Group takes a conservative approach before further committing itself. Maintain UNDERPERFORM with unchanged Target Price of RM1.90.

Finding it tough in FMCG business. To recap, OLDTOWN recorded net profit of RM11.7m in its recently released 1Q15 results, which was down 4% YoY and 2% QoQ. The weaker result was mainly due to the higher sales and distribution expenses, which jumped 36% YoY as compared to the revenue growth of 7.3%; as the Manufacturing of Beverages (MB) division incurred higher sales and distributions costs (+49% YoY) by giving price discount of its product due to an increasingly competitive market. This is in line with our observation that the competition level in the market is getting more intense on the back of poor consumer sentiment and entrance of new competitors.

Not expecting turnaround anytime soon. SSSG was unimpressive in 1Q15 at below 2%, while the Group also attributed the flattish revenue growth (+4% QoQ, +5.5% YoY) in its CC segment to the renovation works on some of its outlets as well as the temporary closure of 10 outlets due to relocation exercise in the past six months. Moving forward,

the Group targets to open 12-15 new outlets in Malaysia, 6-8 in Indonesia and 2-3 in Singapore in 2014. Meanwhile for the China market, the Group is in the midst of revamping its operating strategy and thus we expect the Group to be conservatively monitoring the market before making its next move.

New strategy drafted. With an eye to boost the spending and sales in its CC outlets, the Group is planning to tap into the family and kids market (families with children of between 6-10 years old) by introducing meal set for the juniors as survey revealed that there is such demand in the children segment. We are positive on the Group’s innovation as the identification of new markets is essential in sustaining the sales growth in is CC division on the back of tough operating environment and soft consumer sentiment. At this juncture, we do not factor in any extra earnings contribution from the new strategy as we reckon it is still in the preliminary stage.

More gravity on overseas market. 1Q15 sales in the MB division saw a growth of 9.6% YoY with the overseas market outperforming the local market (10.6% vs 8.6%). Moving forward, OLDTOWN is planning to focus more on the overseas market with China, Hong Kong and Singapore being identified as the key markets to grow. The Group has actively undertaken promotional and advertising activities in the targeted market and we gathered that the response has been encouraging.

Maintain UNDERPERFORM with unchanged Target Price of RM1.90. We continue to peg our TP to 17.1x PER FY15 EPS of 11.1 sen, which implies +0.5 SD 2-year mean PER. Share price reacted negatively (-5%) by trending towards our TP following the disappointing result which prompted our earnings forecast cut. We remain cautious on the Group’s outlook as we expect OLDTOWN to face further challenges in both its MB and CC divisions in view of the higher operating expenses as well as marketing expenses while the overall consumer sentiment remains weak.

Source: Kenanga