News  In an announcement to Bursa Malaysia, OLDTOWN announced that it is acquiring a 51% stake in Hong Kong-based April Eight (China) Ltd (AEC) from Join Dream Group Ltd (JD) for HK$3m or RM1.4m, through its subsidiary, OldTown Logistics Sdn Bhd (OTL).

 The move will pave the way for OLDTOWN to gain access to Guangzhou Supreme Food Service Limited (GSF), a wholly foreign-owned subsidiary of AEC, which is involved in central kitchen business in Guangzhou, PRC.

Comments  We were not surprised by the move as the Group has long indicated its intention to re-strategise and revamp its business concept and market positioning in China after a less successful venture previously, which saw 4 outlets owned by previous master licensee closing down. Subsequently, OLDTOWN has opened a directly managed outlet in China in September 2014.

 We are positive on this latest move as the central kitchen will ensure that the products supplied to the café outlets meet the specifications and food safety standards. The centralised kitchen would also allow for a more consistent delivery of quality products to the outlets while ensuring price efficiency due to consolidated procurement.

 Funding is not expected to be a problem to the Group as the consideration of RM1.4m is minimal to the Group’s N.Cash position of RM70m.

Outlook  The outlook of the Group could be significantly boosted if the central kitchen can provide the thrust for the Group to penetrate the huge Chinese market. However, at this juncture we still adopt a wait and see approach in view of the challenging and competitive business environment in China.

 Next quarterly financial results are set to be announced next month and we are expecting to see improvement in both FMCG and restaurants divisions with the normalization of earnings after being disrupted by temporary setbacks in the previous quarters.

Forecast  We made no changes to our forecast as the move is more supplementary in nature to its restaurant outlet in China rather than earnings accretive. Moreover, earnings contribution from China is insignificant as there is only one outlet in China as opposed to a total of 245 outlets the Group is operating in Malaysia, Singapore, and Indonesia.

Rating Maintain OUTPERFORM

Valuation  Maintain our TP of RM1.79 based on 14.1x FY16F PER, which is below its 3-year mean PER.

Risks to Our Call  Worse-than-expected consumer sentiments.

 Delay in expansion plans.

Source: Kenanga