Period

1Q16

Actual vs. Expectations

1Q16 net profit of RM9.5m (-18.9%) was below expectations, accounting 16.5% of our in-house forecast and 18.4% of the consensus. The negative deviation can be attributed to the weakerthan- expected contribution from the Café chain (CC) business.

Dividends

None, as expected.

Key Results Highlights

YoY, 1Q15 revenue declined 3.9% to RM94.1m mainly due to the lower sales from CC (-15.1%) and we believe that the GST implementation has dampened consumer sentiment and spending particularly in the retail space. Manufacturing of beverages (MB) recorded healthy growth of 10.3% to RM47.5m due to the higher local sales. Meanwhile, PBT declined 11.3% to RM13.6m, primarily driven by the weak earnings from CC division but mitigated by a strong 29% growth in MB business. Higher effective tax rate of 28.4% (1Q15: 20.4%) saw net profit declining at a faster pace of 18.9%, falling to RM9.5m.

QoQ, revenue fell by 10.5% due to the steep drop in revenue contribution from CC, which we think can be attributed to seasonality as well as the GST implementation. Group PBT dipped 24.0% to RM13.6m due to the lacklustre performance in CC division which recorded a drop of 47.1% to RM4.5m with margin narrower by 5.6ppt to 9.6% on the back of lower sales. Besides, higher sales in MB did not translate into higher PBT growth as the Group incurred higher distribution costs which we think were due to aggressive sales and marketing activities. As a result, net profit fell 30.6% to RM9.5m.

Outlook

The negative impact to the CC division from the weak consumer sentiment and GST implementation was worse-than-expected, but we optimistically expect sentiment to recover gradually as consumers adapt to the new costing environment. Meanwhile, margin in MB division also experienced erosion which we think is due to the competitive landscape in the local market. However, we think that the higher distribution costs incurred might bear fruits over the longer term after the Group consolidate its position in the market.

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 resilient demand for FMCG products. 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.

Change to Forecasts

We factor in lower sales growth in the CC division as well as imputing lower margin for the MB division. As a result, FY16E and FY17E net profits were trimmed by 10.0% and 6.7%, respectively.

Rating

Maintain Outperform

Our TP offers upside of 17.5% after the recent sell-down amid the weak broader market sentiment. The stock is currently trading at 11.7x PER CY16E, close to -2 SD over the 3-year mean which we deem as unwarranted considering the expected positive earnings growth of 1.7% and 9.3% in the next 2 years and we expect the MB division to drive growth.

Valuation

Our Target Price is adjusted lower to RM1.65 (from RM1.79), correspondingly with the earnings downgrade and also the roll-over of the valuation base year from FY16 to CY16. TP is based on unchanged 14.1x PER.

Risks to Our Call

Higher-than-expected operating costs.

Sector risks: Worse-than-expected consumer sentiment.

Source: Kenanga Research - 28 Aug 2015