Period  2Q15/6M15

Actual vs. Expectations OLDTOWN’s 1H15 net profit of RM23m (-2.6%) was within our expectation but below the consensus’. The numbers accounted for 45.6% of our in-house forecast but only 43% of the street’s estimate.

Dividends  No dividend was declared, as expected.

Key Results Highlights YTD, 1H15 revenue grew marginally by 1.6% to RM189.6m, contributed mainly by the café chain (CC) segment (+3.8%) on the back of 18 net new store openings while manufacturing of beverages (MB) recording a slight decline (-1%) during the period. PBT, however, slid 3% to RM30.1m due to the weak performance of the MB division (-7.1%), with the higher selling and distribution expenses the main culprit in light of the competitive operating environment in the FMCG market.

 QoQ, 2Q15 revenue fell 6.3% to RM91.7m with both operating segments suffering declining sales. Despite 8 net new outlets openings, revenue contribution from CC division was down by 7%, due to the soft consumer sentiment as well as partly affected by the fasting month. 2Q15 PBT shrank 3.3%, dragged down by the lacklustre sales in CC division, which resulted in 34.2% drop in segmental PBT. However, the saving grace was from the BM division which registered PBT jump of 36.1% despite lower sales, thanks to the lower selling and distribution expenses in the quarter.

Outlook  We remained cautious on the outlook of the Group in view of the continuous soft consumer sentiments which has negatively affected the performance of both its CC and BM segments. We do not expect to see a quick turnaround in the local market, which contributed more than 70% in sales revenue with the consumer spending being restricted by the higher living cost environment.

 Going forward, more gravity or focuses will be shifted to overseas market as the Group plans to strengthen its regional presence via new café outlets openings with 2-3 new outlets targeted to be opened in Singapore while another 6-8 to be opened in Indonesia.

Change to Forecasts We made no changes to our earnings forecasts.

Rating Upgrade to MARKET PERFORM (from UNDERPERFORM)

Valuation  However, we downgrade our Target Price to RM1.76 (from RM1.90) as we have rolled over our valuation base to FY16E.

 Nonetheless, we are pegging FY16E EPS of 12.5sen to a lower PER of 14.1x, below 3-year mean PER (from 17.1x, +0.5SD 2-year mean), as we opt to be more conservative on the valuation in view of the persistent soft consumer sentiments.

 MARKET PERFORM. The lower TP of RM1.76 still represents an upside of 6.7% from the last closing price as the share price has corrected 19% since our rating downgrade last quarter.

Risks to Our Call Intense market competition.

 Higher operating costs.

Source: Kenanga