We attended OLDTOWN’s 4Q17 results’ briefing and came out feeling reassured on the group’s growth strategies: its priority to expand its FMCG products abroad. While the Café Chain segment has not been registering inspiring growth results, we are hopeful that its streamlining efforts would bolster group earnings in the near future. Maintain MARKET PERFORM and TP of RM2.95 based on 18.0x FY18E PER.

Café chain streamlining continues. Recall that the group had recorded RM191.4m in FY17 Café Chain sales, a flattish decline (- 1%) from the prior year. The sales results were in spite of fewer stores that were in operation at 234 compared to 244 stores in FY16. While store sales in the primary regions such as Malaysia and Singapore were softening, other international segments (i.e. Indonesia, China and Hong Kong) were registering growth following the opening of new strategic outlets. Going forward, the group intends to boost local sales by expanding on more traditional formats outlets and cost efficient locations. However, we believe the group would continue to weed out non-performing outlets and allocate resources in more profitable locations, which may lead to an immaterial net store growth in FY18.

Export-driven FMCG. To recap, FY17 sales in the FMCG Manufacturing segment grew by 17% with PBT growth of 33%, on the back of the favourable reception in the Greater China export market. Other regions especially in the USA, Canada and Australia have also been registering double-digit growth rates, albeit at a lower-teens level. As local sales growth appears to be at a phase of stagnancy arising from poor consumer spending, the group intends to focus its marketing efforts on the larger and more vibrant foreign markets, through various e-commerce and retail platforms. Margins in this segment continue to benefit from favourable forex exposures and cost-efficient local production facilities, providing the group with some leverage amidst rising costs of raw materials and commodities. challenges abound, seeking opportunities abroad. We stand by the group’s growth strategy for the coming year as we continue to observe weakness in our domestic consumer sentiment, further reflected by the flattish performance yielded by the group’s affected segments. Further, we believe the group could leverage on its solid foothold in the Greater China market towards exponential growth given its significantly larger population base and consumer spending habits. As the group’s production utilisation rate continues to hover 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.

Post-briefing, we made no changes to our earnings estimates for FY17E/FY18E.

Reiterate MARKET PERFORM and maintain TP of RM2.95. Our target price is based on a 18.0x FY18E PER, which is closely in line with the stock’s +2SD over its 3-year Forward average PER. We believe the valuation is justified as highly export-exposed FMCG players tend to trade at a premium. Dividend yields for the stock could possibly register at 4.0%/4.3% in FY18E/FY19E, assuming a payout ratio of c.70%, which is closely in line with the group’s 2-year historical trend.

Source: Kenanga Research - 29 May 2017