We attended OLDTOWN’s 3QFY15 results briefing which saw overwhelming attendance of more than 60 analysts and fund managers and feeling more assured of our earnings forecasts which foresee stronger performance in Manufacturing of Beverages (MB) division vis-à-vis the Café Chain (CC) division. The Group has lined up various strategies for both divisions moving forward, with promotional activities in conjunction with 10th anniversary of CC and new segment penetration to drive the division forward; while similarly through marketing activities and new targeted segment, penetration in second-tier cities in China to drive earnings growth in the MB division. All in, we maintain our neutral stance on OLDTOWN as we believe the earnings excitement in the MB division could be offset by the challenging market condition in CC division. Reiterate MARKET PERFORM with maintained Target Price of RM1.79.

Export sales the main driver. To recap, OLDTOWN recorded 9M15 net profit growth of 0.9% to RM37.3m on the back of marginally higher revenue (+1.9%) amounting to RM292.6m. Both sales growths in CC and MB divisions (+0.8% and 3.1% respectively) were largely driven by the overseas market rather than domestic sales, which we believe were affected by persistent weak local consumer sentiment. Post-briefing, we keep our FY15E and FY16E net profit of RM51.2m and RM57.8m, respectively, unchanged as the progress of both divisions are well within initial expectations.

Challenging domestic CC market. 9M15 sales in CC division was driven by overseas sales, which grew 11% while the domestic sales growth was flattish despite a net increase of 12 outlets in CY2014, which can be attributed to weak consumer sentiment and subdued consumer spending throughout the year. Moving forward, the Group is targeting to embark on various promotions in conjunction with the 10th year anniversary celebration of CC business, starting April 2015to boost sales; while also aiming to penetrate the children segment by innovating and customising relevant food menus. While we laud the Group’s innovative effort and commitment in promotional activities, we remain wary of the challenging local market, which commands 91% of the 9M15total CC revenue in view of the imminent implementation of GST on 1st April 2015, which could further dampen consumer sentiment.

Rosier outlook for MB division. For the MB segment, sales surged tremendously in 3Q15 by 29.8% due to the recovery in export sales, which was temporarily affected by certification and licensing issues in 2Q15. 9M15 segmental revenue grew 3.1%, which was led by the robust export sales, up 4% YoY despite the temporary blip in 2Q15, mainly due to 13% sales growth in China. Looking forward, OLDTOWN is eyeing to intensify the marketing and promotional effort in order to sustain its leading position in both domestic and export markets, while also targeting second-tier cities in China as new potential market to penetrate through new distributors and retailers. We are positive on the progress of overseas market development, which is in line with our initial expectation and thus keep our FY15E segmental PBT growth of 7.8% unchanged.

Reiterate MARKET PERFORM with maintained Target Price of RM1.79. Our TP is based on FY16E PER of 14.1x, which is just below its 3-year mean PER. While we are positive on the development of the MB division, we are wary of the challenging outlook in the CC division, particularly in view of the imminent implementation of GST. In a nutshell, we think that its share price is reflective of the earnings growth potential of OLDTOWN. Hence, we maintain our neutral stance on the company. 

Source: Kenanga