9M17 core net profit of RM50.9m (+50% YoY) was above our/consensus expectations from stronger-than-expected exports backed by wider margins from forex gains and lower marketing expenses. YTD dividend of 6.0 sen declared was within expectation. While we made no changes for now pending further details from briefing, we are positively bias on group prospects given the growing export market and recovering consumer demand.

9M17 core earnings beat expectations. 9M17 core net profit of RM50.9m beat expectations, making up 89%/88% of our/consensus estimates. The positive deviation was due to stronger-than-expected export sales in the Manufacturing segment. An interim dividend of 3.0 sen was declared, for YTD dividend of 6.0 sen. We deem this within our FY17 estimate of 6.5 sen as the group typically pays dividends only twice a year.

YoY, 9M17 revenue of RM318.2m grew 10% on the back of stronger performance from the Manufacturing segment (+20% YoY) which was led by higher exports to China. The Café Chain segment meanwhile, registered flattish growth (<1% YoY) despite having fewer outlets at 234 stores (vs. 245 stores in 9M15), indicating a recovery in demand. PBT increased by 42% to RM67.6m with stronger margins of 21.2% (+4.7 pts YoY) from better forex gains and lower selling expenses from the Manufacturing segment. However, this was slightly offset by the increase in staff costs and higher depreciation in the Café Chain segment. 9M17 core net profit closed at RM50.9m (+50% YoY).

QoQ, 3Q17 top-line improved by 16% thanks to better Manufacturing sales (+31% QoQ) but flattish Café Chain sales (+1% QoQ). On the PBT level, 3Q17 registered 94% growth to RM31.6m with an expanded margin of 27.3% (+14.0 pts QoQ). This is from the collective improvement in the Café Chain segment PBT (+33%), possibly due to lower staff costs and the Manufacturing segment PBT (+98%) from stronger export sales margins. As such, 3Q17 core net profit grew concurrently by 95% to RM24.4m.

Gleaming outlook. While sales numbers on the group’s cafés have been stagnant, we believe this is an early indication of recovery in consumer sentiment towards OLDTOWN products as net outlet number have been declining in efforts to streamline poor performing stores. In addition, with the encouraging reception of FMCG products of the Manufacturing segment in the export markets (particularly in China), we believe aggressive marketing initiatives in this area may bolster more rapid sales growth.

Maintain OUTPERFORM with an unchanged TP of RM2.11. While we leave our FY17E-FY18E earnings estimates unchanged for now pending further details from the briefing today, our new earnings assumptions could have upside bias. Our unchanged TP of RM2.11 is based on our prevailing 15.1x PER FY18E (which is close to its 3- year mean PER). Risks to our call include: (i) weaker-than-expected sales, (ii) higher-than-expected operating costs and (iii) unfavourable currency exchange exposure to the group

Source: Kenanga Research - 23 Feb 2017