OLDTOWN had executed a License Agreement to provide a licensee the rights to operate café outlets and sell OldTown products within Yangon, Myanmar. While we are positive on the development, we make minimal changes to our earnings forecast given the limited contribution from the regional expansion in the short-term. Maintain OUTPERFORM call with an unchanged TP of RM2.11 based on 15.1x PER FY18E (close to its 3-year mean PER). Licensing of café outlets in Myanmar. Last Friday, OLDTOWN announced that it had executed a License Agreement with Nikmat Mujur Sdn Bhd (the Licensee) to operate café outlets in Yangon, Myanmar.

Under the agreement, the Licensee shall obtain a non-exclusive right to use the Trade Mark, Trade Name, Knowhow and any other Intellectual Property, and certain standard operational procedures, plans directions, specifications, methods, management, training, Point of Sale Systems and advertising techniques, to sell the Approved Products and to provide specialised services within the City of Yangon, Myanmar. The Licensee would also obtain an exclusive License to operate 3 Direct License Outlet within the area for a 24- month period from the date of the License Agreement. For the abovementioned rights, the Licensee would compensate OLDTOWN through the form of various license fees and royalties (refer to overleaf for further details). A Master License agreement may be entered shall the Licensee intend to operate the outlets pass the initial 24-month period and with outlets other than the 3 approved Direct License Outlets.

We are positive on the news as it provides OLDTOWN with the means to establish a stronger foothold in a new market. In addition, we believe that this will enable the group to test the brand acceptance of its products in a more cost-effective manner before considering establishing fully-owned outlets or pursuing aggressive retail distribution. Furthermore, given the stable economic growth and outlook of Myanmar’s economy as well as the sizeable population in Yangon (i.e. c.5.3m people), we would not be surprised if the group seeks to further expand its outlet size on top of the initial 3 outlets in the short term.

However, given the 9 months construction period for the Licensee to establish the pilot outlet as well as the low base of foreseeable initial café outlets intended to be operated, we believe earnings contribution from the initiative will only yield minimal improvement in the near- term. Hence, we tweak our FY18E earnings with an immaterial 0.3% upgrade to account for the additional license fees revenue and expected product sales to these new licensed outlets.

No changes to call and TP. We maintain our OUTPERFORM call and TP of RM2.11, based on 15.1x PER FY18E (which is close to its 3-year mean PER) given the minimal impact on net earnings. Valuation is undemanding in view of the sturdy balance sheet (net cash as of 1H17: RM174.5m or 39.0 sen/share) and strong cash flow, which will allow the company to continue rewarding shareholders with dividends. In addition, we believe the share price weakness since the removal of the group’s Shariah-compliant had been overplayed and may offer entry opportunity as the group’s fundamental and growth prospect remain unchanged.

Source: Kenanga Research - 13 Feb 2017