Period

2Q16/1H16

Actual vs. Expectations

1H16 net profit of RM22.8m (-0.5%YoY) accounted for 43.9% of our in-house forecast and 48.3% of the consensus estimates. We deem the results as broadly within expectations as we foresee stronger numbers ahead in view of the sustained growth momentum in Manufacturing of Beverage (MB) division and the recovery in Operation of Coffee Chain (CC) business.

Dividends

None, as expected.

Key Results Highlights

YoY, 1H16 revenue recorded a decline of 4.2% to RM186.7m as the lacklustre performance (-13.1%) in CC division was partially mitigated by the healthy growth (+11.1%) in MB business. PBT inched up marginally by 0.2% to RM30.2m, again thanks to the strong growth in MB which contributed PBT of RM19.7m (+17.1%). Meanwhile, the CC division suffered a dip of 28.6% to RM9.9m as the retail-based business was affected by the weak consumer spending. As a result, net profit shrank 0.5% to RM22.8m.

QoQ, 2Q16 revenue fell marginally by 1.5% to RM92.6m as revenue contribution from MB division was 4.0% lower than 1Q16 as it was boosted by aggressive post-GST marketing activities. However, CC division chalked up encouraging growth of 7.5% from a low base in 1Q16, which was affected by the weak consumer sentiment caused by GST implementation. 2Q16 PBT surged 22.3% to RM16.6m as CC division grew 20.9% to RM5.4m, driven by the stronger sales. Meanwhile, PBT jumped 14.4% in MB division due to the recovery in PBT margin (from 19.4% to 23.1%) as 1Q16 margin was brought down by the aggressive marketing activities. Net profit growth between quarters was overwhelming at 40.8% to RM13.4m due to normalization of the effective tax rate (from 28.4% to 19.3%)

Outlook

The strong QoQ growths in both operating divisions are encouraging signs. We believe the worst might be over forthe CC division, as suggested by the recovery in sales as we think that consumers have started to adapt to the new pricing environment post-GST which was also further aided by advertising and promotional activities to stimulate demand. Meanwhile, the MB division continues to deliver steady earnings growth which we think can be sustained thanks to the sales and marketing strategy in place for both local and export market.

Worth noticing, the contribution of MBdivision 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

No changes to our earnings forecast.

Rating

Maintain Outperform

The stock is currently trading at 10.9x PER FY17E, below its -2 SD over the 3-year mean which we deem unwarranted considering its expected positive earnings growth of 1.7% and 9.3% for the next two years and the recovery in the retail-based CC business, which we think is the main concern resulting in the low current valuation by the market.

Valuation

Our TP is upgraded to RM1.76 (from RM1.65) after we roll over our valuation base to FY17E. TP is pegged at unchanged 14.1x PER, close to its -1 SD over the 3-year mean.

Risks

Higher-than-expected operating costs.

Sector risks: Worse-than-expected consumer sentiment.

Source: Kenanga Research - 26 Nov 2015