1H17 core earnings of RM26.5m matched our (46%) and market (46%) expectations. First DPS of 3.0 sen was declared. Our earnings forecasts are kept unchanged. Manufacturing of Beverages (MB) will continue to drive earnings growth while Operation of Café Chain (CC) might be a drag to earnings due to higher operating costs. We maintain MARKET PERFORM on OLDTOWN with higher TP of RM2.11 after rolling forward our valuation base year.

Within expectations. 1H17 core net profit of RM26.5m (+16.1% YoY) was within expectations by accounting for 46.2% of our inhouse forecast and 46.1% of the street’s estimate. 1st interim DPS of 3.0 sen was declared payable on 16 February 2017.

YoY, 1H17 revenue grew 8.4% to RM202.4m, driven mainly by MB (+16.0%) thanks to the robust sales and recovery in export sales while CC was flattish (+0.9%) on the back of persistently weak consumer sentiment. 1H17 PBT jumped 19.3% to RM36.0m thanks to the strong performance in MB (+39.7%) following the recovery in sales, which more than offset the weakness in CC (-10.0%) as it was hit by the higher operating costs arising from higher staff costs. As a result, 1H17 net profit leaped 16.1% to RM26.5m.

QoQ, 2Q17 revenue declined marginally by 3.3% to RM99.5m as MB sales dipped 11.5% to RM50.7m which the Group attributed to seasonality and lower domestic sales but CC sales was steady (+7.2%) thanks to effective marketing and promotional campaigns. Meanwhile, 2Q17 PBT dipped 17.9% to RM16.3m which was mainly attributable to the shortfall in MB (-22.2%) on the back of weaker sales and the swing in marketing expenses in between the quarters. As a result, segmental PBT margin narrowed 3.3ppt to 23.8%. 2Q17 net profit fell by a milder quantum of 9.2% to RM12.6m, aided by the normalization of effective tax rate to 23.3% (vs 1Q17:30.8%)

Healthy growth. We are not too concerned over the weakness in MB as 2Q17 sales was affected by seasonality factors which should normalize in coming quarters. Meanwhile, we are encouraged by the sales growth in CC despite the weak consumer sentiment, showcasing the Group’s flexibility and market awareness in adopting the right strategy in growing its sales. Looking forward, we expect MB to continue driving growth on the back of robust export sales particularly to China on successful sales channel restructuring while the Group is also looking to strengthen its position in other key export markets.

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

Maintain MARKET PERFORM with higher Target Price of RM2.11 (from RM1.92). We raise our TP to RM2.11 after rolling forward valuation base year to FY18. TP is 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 strongly with YTD gain of 29% but we view the stock as fairly valued at this juncture as we believe that the positives have been priced in.

Source: Kenanga Research - 25 Nov 2016