Period

4Q15/FY15

Actual vs. Expectations

Core net profit of RM51.0m (excluding impairment loss of RM3.5M) was within both our in-house and consensus’ expectation by accounting for 99.6% and 102.2% of the forecasts, respectively.

Dividends

3.0 sen/share of dividend was declared, bringing FY15 total payout to 6.0 sen/share. The DPS was slightly below our expectation of 7.0 sen/share due to the lower actual payout ratio of 52% (vs 62% of forecast).

Key Results Highlights

YoY, FY15 revenue grew marginally by 4.1% to RM397.7m underpinned by growth from both operating segments, namely operating of café chain (CC) at 4.8% and manufacturing of beverages (MB) at 3.2%. We believe the growth in CC was mainly driven by the net openings of 12 new outlets in CY14, but core PBT declined by 5.2% to RM29.7m which can be attributed to higher operating costs and selling and distribution costs. The MB division recorded moderate growth of 6.0% to RM38.1m in terms of PBT contribution, as it was dragged down by several licensing and certification issues early FY15 which affected the export sales. As a result, core net profit rose 1.3% to RM51.0m.

QoQ, 4Q15 revenue increased by 2.0% to RM105.1m, as the 17.4% decline in MB sales was more than offset by the 22.5% growth in the CC division. The lower revenue in MB was due to seasonality while the strong CC performance could be attributed to the CNY festival during the quarter. Core PBT contribution by CC division, however, dropped by 15.7% to RM8.4m probably due to the higher marketing expenses incurred in order to stimulate the weak consumer sentiment. Core net profit was lower by 4.8% at RM13.7m, dragged down by the seasonal lower contribution (-25.1%) from MB division.

Outlook

We foresee further challenges ahead for the Group, particularly in the CC division, as consumer sentiment might be further dampened by the GST implementation. Meanwhile, the Group has planned to open more than 20 outlets in FY16 which we think is the key to sustain revenue growth. We expect further margin erosion after division PBT margin narrowed to 13.7% from 15.1% in FY14 as the Group is expected to embark on more marketing and promotional activities in order to boost sales and to fend off the competition in the competitive F&B market.

Meanwhile, MB division is expected to spearhead the earnings growth moving forward after contributing 56.3% of total Group PBT, up from 54.1% in FY14. Division PBT growth of 6% was achieved despite the temporary blip in the early part of FY15 whereby the Group had to address several issues in regard to certification and licensing, which impacted the export sales.

As such, we forecast the MB division PBT to grow 25% in FY16 assuming the full-year normalization of the MB business. We think the growth potential can drive the Group earnings moving forward considering that we are expecting flattish growth in CC division. All in all, FY15 will be encouraging for OLDTOWN with 13.4% net profit growth forecasted while the Group is also sitting on a net cash of RM115.7m as of FY14, which we think will be essential for the Group to further expand its business.

Change to Forecasts

We made no changes to our FY16E earnings, but we take this opportunity to roll out FY17E earnings with net profit of RM60.8m, which implied 5.4% growth.

Rating

Upgrade to OUTPERFORM from MARKET PERFORM

Last closing price offers a higher 13.1% total return (9.1% capital gain and 4% dividend yield), which warrants a rating upgrade as per our stock recommendations guidelines.

Valuation

Our Target Price is maintained at RM1.79, based on unchanged 14.1x FY16E (below -0.5SD over 3-year mean). We think that the valuation is undemanding with the stock trading at 12.9x PER FY16E, which is close to its -1SD 3-year mean.

Risks to Our Call

Weaker-than-expected export sales

Weaker-than-expected consumer sentiments

Source: Kenanga Research - 21 May 2015