1Q17 core earnings of RM13.9m (+46%) matched our (24%) and market (25%) expectations. No DPS was declared, as expected. No changes made to our earnings forecast. We think that Manufacturing of Beverages (MB) division will continue to drive earnings growth while Operation of Café Chain (CC) might still be a drag to higher earnings growth. As such, we are maintaining our MARKET PERFORM rating on OLDTOWN with unchanged TP of RM1.92.

Within expectations. 1Q17 core net profit of RM13.9m (+46.3% YoY) was within expectations by accounting to 24% of our in-house forecast and 25% of the street’s estimate. No DPS was declared, as expected.

YoY, 3M16 revenue grew 9.4% to RM102.9m driven by solid performance in MB division (+20.6% to RM57.3m) as strong growth in export sales (+72%) more than offset the softness in the local market (- 23%). Meanwhile, sales contribution from CC fell marginally by 2.1% to RM45.5m due to the earlier timing of fasting month in comparison. 3M16 PBT jumped 45.6% to RM19.8m again thanks to the impressive MB division. As a result, net profit surged 46.3% to RM13.9m.

QoQ, 1Q17 revenue was flattish at -1.6% as healthy growth in MB (+7.4%) was more than offset by the seasonal weakness in CC (-10.9%). 1Q17 PBT fell 4.2% to RM19.8m, in line with the drop in revenue. However, the contribution from MB declined by 8.1% to RM15.5m from high base in 4Q15 as marketing expenses normalized. Meanwhile, PBT margin improved by 1.7ppt in 1Q17, suggesting the sales and marketing strategy might have started to bear fruit. However, the higher effective tax rate of 30.7% in 1Q17 as a result of deferred tax dragged net profit down by 35.0% to RM13.9m.

MB the growth anchor. As guided by management, the strong margin in MB did not sustain into 1Q17 but the sales growth was encouraging. Meanwhile, CC division has yet to show strong signs of recovery on the back of weak consumer sentiment, but we are relieved to spot margin expansion as the company has managed to protect its profitability despite negative headwinds. Looking forward, we expect MB to continue to drive growth for the Group on the back of strong recovery in export sales particularly in China as a result of successful sales channel restructuring while the Group is also looking to strengthen its position in other key export market.

Earnings maintained. We made no changes to our earnings forecast.

Maintain MARKET PERFORM with unchanged Target Price of RM1.92. We maintain our TP, based on unchanged 15.1x PER FY17E. The valuation is on par with its 3-year mean which we think is reflective of the mixed outlook between the two operating divisions. Share price has rallied post-4Q16 results and the special dividend declared, but we see limited upside from the current level as we think the weakness in CC division might still be a drag to earnings growth in the near-term barring significant recovery in consumer sentiment.

Source: Kenanga Research - 26 Aug 2016