We came away from OLDTOWN’s FY15 analysts’ briefing feeling more assured of our earnings forecasts for the company. FY16E net profit of RM57.7m (13.1% growth) will be underpinned by the Manufacturing of Beverages (MB) division while we expect the Café Chain (CC) business to stay flattish in view of the weak consumer sentiment, particularly with the implementation of GST. We believe the stock is undervalued considering that it is currently trading at 12.7x PER FY16E (close to -1 SD over the 3-year mean) while still offering decent dividend yield of c.4%. Thus, we reiterate our Outperform rating on OLDTOWN with unchanged TP of RM1.79 based on 14.1x FY16E (below -0.5SD over the 3-year mean). The valuation is justified given the commendable earnings growth moving forward, healthy balance sheet and its dominant position in the FMCG business.

Mixed fortune for operating divisions. To recap, the Group recorded core net profit of RM51m on RM397.7m revenue. The net profit growth was flattish at 1.3% owing to the MB division which registered healthy growth of 6% despite hiccups during the year. To summarize, the CC division was hit by persistent soft consumer sentiment while the MB division was affected by lower-than-expected export sales on the back of temporary blip with regards to the licensing issues and delays in marketing plan execution.

FMCG to regain strength. Sales volume in MB division increased marginally by 1% in FY15, which was brought down by the weaker export sales due to the reasons mentioned above. Moving forward, we are expecting sales growth of 14.6% in FY16, which is in line with the management’s guidance of 15%. The management is optimistic of growth prospect, which is supported by its dominant position in key markets, including Singapore, Hong Kong and Malaysia as well as the normalization of export sales. PBT growth is forecasted to be at 17.3% as we expect margin expansion due to the lower raw material prices and the continuous execution of efficiency improvement programmes.

F&B to be challenging. The Group plans to open 27 new outlets in FY16 with the focus still on Malaysian and Indonesian markets with 10 outlets each being earmarked. The expansion plan is in line with our initial expectation but while we expect the additional outlets to chip in extra sales of c.5% in FY16, we are assuming flattish PBT growth considering the transition period in the local market in response to GST implementation. Moving forward, the Group is aiming to target the family and kids segment as a strategy to combat the stiff competition while further marketing activities will be rolled out in conjunction with its 10th anniversary celebration. While we are positive on the Group’s innovative plans, we expect muted to little earnings impact with the additional earnings to be offset by the higher marketing expenses.

Transforming into FMCG play. Worth noticing, the contribution of MB division to group PBT has grown to 56% in FY15 from 45% in FY12 while we forecast the contribution to further expand to 60% in FY16 with the sales normalization and margin expansion. As such, we believe investors should angle OLDTOWN as a growing FMCG play, which can offset the earnings volatility risk of the more challenging retail F&B sector.

Earnings forecasts maintained. We make no changes to our earnings forecasts post-briefing.

Reiterate OUTPERFORM. We maintain our call on the stock with unchanged Target Price of RM1.79, based on 14.1x FY16E which is slightly below -0.5SD over the 3-year mean. The stock offers a decent dividend yield of c.4% assuming a conservative payout ratio of 51.1% vs 4-year average of 54.8% while balance sheet is also healthy with RM115.7m net cash in hand. Valuation is undemanding at 12.7x PER FY16E which is close to its -1 SD 3- year mean which we think is unjustified in view of the 13.1% anticipated earnings growth in FY16E and the strong potential of the FMCG business.

Source: Kenanga Research - 29 May 2015