Period

3Q16/9M16

Actual vs. Expectations

9M16 net profit of RM33.9m (-9.1%) was below our expectation by matching only 65% of our full-year forecast but in line with the consensus, at 72% of the streets’ estimates. The negative deviation can be attributed to the higher effective tax rate.

Dividends

As expected, an interim dividend of 3.0sen/share was declared. This is in line with the expectation ofa total DPS of 6.0 sen for FY16.

Key Results Highlights

YoY, 9M16 revenue fell by 3.9% to RM288.9m mainly attributable to the sales decline in CC (Operation of Café Chain) division on the back of weak consumer sentiments and GST implementation but MB (Manufacturing of Beverages) division growth was healthy at 6.7% to RM146.0m. 9M16 PBT shrank by 4.4% to RM47.6m due to the weakness in CC segment (-23.0%) but partially cushioned by resilient performance of MB (5.7%). However, higher effective tax rate of 28.0% (vs 9M15: 22.0%) dragged net profit down by 9.1% to RM33.9m.

QoQ, 3Q16 revenue spiked up by 10.4% to RM102.2m thanks to growth in both operating segments. We believe the growth in CC division was due to the year-end holidays and festivities while MB continued its growing momentum post the restructuring exercise in sales channel. 3Q16 PBT rose 4.4% to RM17.4m driven by higher contribution from the CC division (+21.1% to RM6.5m) on the back of higher sales while the growth in MB division was modest at 3.6% due to higher A&P expenses. However, higher effective tax rate of 36.0% (vs 2Q16: 19.3%) caused net profit to fall 17.1% to RM11.1m with the tax expenses swing between the quarters close to double (+94.6%).

Outlook

CC division seen improvement in both sales and PBT for the second consecutive quarters, which we believe is the results from the effective marketing activities. We expect the momentum to be sustained into the final quarter in view of the Chinese New Year celebrations.

As expected, MB division continued to grow steadily due to the defensive nature of its FMCG products despite weak sentiment while the weak MYR also helped its export business. More A&P expenses are expected to be incurred moving forward particularly in the local market which is dogged by intense competitive and soft consumer sentiment.

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 (9M16: 64%) 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 keep our earnings forecast unchanged pending clarifications on the tax rate in the result briefing today.

Rating

Maintain Outperform

While there could be earnings downside depending on the reason of higher tax rates, we maintain our positive view on the counter as we believe it is on track to earnings recovery, at least on the operating basis.

Meanwhile, current valuation of 12.6x PER FY17E (close to -1.5 SD over 3-year mean) is undemanding considering its growing FMCG exposure.

Valuation

We maintain our TP of RM1.76, based on unchanged 14.1x PER FY17E, which is close to -1 SD over 3-year mean.

Risks to Our Call

Higher-than-expected operating costs.

Sector risks: Worse-than-expected consumer sentiment.

Source: Kenanga Research - 26 Feb 2016