We came back from OLDTOWN’s 1Q17 results’ briefing feeling neutral as the persistent subdued performance of its Café Chain (CC) division might continue to be the drag or downside to higher earnings growth. However, Manufacturing of Beverages (MB) division is hopeful to scale greater heights with the successful distribution channel restructuring and encouraging export demand. All in, we reiterate our Market Perform rating with unchanged TP of RM1.92 on the mixed outlook of the both operating divisions.

More challenges ahead for CC. To recap, the CC division was off to a slow start with 1Q17 revenue declining marginally by 2.1% YoY to RM45.5m. Management clarified that the softness was due to the earlier timing of fasting month in 2016 as compared to 2015. Moving forward, management foresees more challenges ahead including the implementation of minimum wage effective July 2016, issues with getting foreign labours and the potential rise in raw material costs. However, strategies and measures have been lined up by the management to mitigate the potential impact. Nonetheless, we do not anticipate a quick turnaround for the division in view of the persistent weak consumer sentiment and cost pressure. Thus, the division might still be the drag to higher earnings growth moving forward.

MB to get even stronger. MB division started FY17 brightly with 1Q17 segmental revenue and PBT surging 20.6% and 68.5%, respectively. The flying-colours results were driven by overwhelming growth in export sales (+72%) which more than offset the weakness in local market (- 23%). While we believe the lower base in 1Q16 (due to restructuring in distribution channels) might have played a part in the impressive export growth, we understand that the growing momentum was strongly driven by the encouraging demand in key markets, including China and Hong Kong. Thus, we foresee the MB division to continue anchoring the earnings growth of OLDTOWN while the Group is also looking to improve its operating efficiency and invest the savings into brandbuilding activities in order to strengthen its position in key export markets.

Reiterate MARKET PERFORM with unchanged Target Price of RM1.92. Post-briefing, we made no changes to our earnings forecasts. We also maintain our TP of RM1.92, based on 15.1X PER FY17E which is close to its 3-year mean PER to reflect the mixed outlook of both operating divisions.

Staying neutral. Share price has rallied post 4Q16 results and the declaration of special dividend, which narrowed the upside to our TP while the dividend yield has shrunk to >4%, and thus diminishing the risk-reward ratio. Fundamentally, while we are hopeful of seeing strong sustainable earnings growth from the MB division while there may be more risks in the CC division on the back of cost pressures and challenging and competitive business environment whereby the general sentiment is subdued. Hence, we are maintaining our neutral stance on the stock at this juncture.

Source: Kenanga Research - 29 Aug 2016