We attended OLDTOWN’s 3Q17 results’ briefing and came out feeling optimistic on the group’s prospects, fuelled by the expanding export market for FMCG products under the Manufacturing segment. In addition, efforts to penetrate new foreign markets in the Café Chain segment may strengthen regional brand awareness and could further benefit the Manufacturing segment. Reiterate OUTPERFORM with a higher TP of RM2.49 (from RM2.11).

More streamlined café outlet base. Recall that the Café Chain segment registered flattish sales growth in 9M17 despite having a smaller store base of 234 stores compared to 245 stores in 9M15. The growth in average store sales can be attributed by the strong performance of some international outlets in Hong Kong and Indonesia, in addition to the re-opening of outlet bases in China. Going forward, the group may be less aggressive in expanding the local store base (+3 stores in 4Q17) to focus on product marketing, it will seek avenues to establish presence in new and untapped foreign markets to enlarge its regional footprint. We believe this would serve as a stepping stone to later introduce FMCG products into these markets for further sales outreach. The group has recently signed a license agreement for operations in Myanmar and could potentially further expand its store locations into Vietnam and Cambodia.

Greener outlook on Manufacturing. To recap, 9M17 sales in Manufacturing grew by 20% with PBT growth of 68%, mainly thanks to encouraging demand in the Greater China export market. On top of aggressive marketing efforts, a variation of distribution channels (i.e. e-commerce platforms, retail markets) in these markets further aided to enhance product awareness and positioning. Margins in this segment benefited from favourable forex exposures and more effective cost management while also having entirely homebound production facilities. Moving forward, the group’s well established distribution networks could seek to penetrate newer markets to grow its regional portfolio, granted with the strong consumer reception in existing markets. In relation to this, the group had recently broadened its distribution network onto the Netherlands market.

We are fairly optimistic with the strategies in place as the group appears to be performing stronger beyond local markets. In addition, we find the group’s method of entering new markets by licensing a small base of café outlets to be viable as it enables them 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. We also like that with the current production utilisation rates hovering at c.50%, the group has plenty of room to undertake larger production volumes to support their regional sales expansion without requiring any significant capital expenses and perhaps enjoy better economies of scale in addition to maintaining thorough quality control. Considering these factors, we boost our FY17E/FY18E earnings estimates by 11.3%/17.7%, primarily backed by strong FMCG performance.

Reiterate OUTPERFORM with a higher TP of RM2.49 (from RM2.11, previously). This is based on our stronger earnings assumptions on the prevailing 15.1x PER FY18E (which is close to its 3-year mean PER). We do not expect further dividends to be paid in FY17 as the group traditionally pays dividends only twice a year. However, our revised earnings assumptions on an estimated dividend pay-out of c.55% may translate to payments of 9.0 sen in FY18 or 4.1% yield.

Source: Kenanga Research - 24 Feb 2017