We attended OLDTOWN’s 1Q18 results’ briefing and came out feeling reassured as their strategies have proven effective, which led to healthier Café Chain sales per outlet and better FMCG performance in both domestic and export markets. Going forward, production costs could potentially ease in tandem with more favourable commodity prices. Maintain OUTPERFORM with a TP of RM3.15.

Better café chain network set in motion. With the recent 1Q18 results, the group recorded RM45.6m in Café Chain sales, which was flattish from the prior year. However, this came with higher same-storesales growth (SSSG) as the group had fewer operating outlets during the quarter (1Q18: 231 stores vs 1Q17: 240 stores) primarily led by the trimming of less profitable stores in Malaysia. With the signing of licensing agreements in Myanmar and China during the year, the group is set to widen its café chain outreach across the regions. During 1Q18, two new outlets have been opened in Myanmar as the firsts in the country with a pipeline of outlets to be launched in Shanghai, China in the coming quarters. However, we believe the group will continue to rationalise operations of non-performing stores and allocate resources into more profitable locations. The net impact could results in an immaterial net store growth in FY18.

Well-rounded improvement in Manufacturing segment. To recap, RM63.7m (+11% YoY) in revenue was registered for 1Q18 FMCG Manufacturing segment. This was an accumulation of stronger domestic sales of RM22.8m (+15%) and export sales of RM40.9m (+9%). Local demand has moved away from a state of stagnancy, likely stimulated by improved marketing efforts as well as the group’s new initiatives to enter into the e-commerce space. On the foreign front, the Greater China region continued to dominate export proportions, accounting for 45% total FMCG sales. Given its significantly larger market, we do not foresee the group to ease in expanding potential demand base. Further, the group could continue to leverage on favourable forex exposures from operating in this segment.

On higher gear. We believe the Oldtown Coffee brand will continue to be well received in the local and foreign markets, given the increasing reception of its products across the regions. While café chain SSSG continues to record expansion, persistent monitoring is still necessary as shifts in economic landscape could reverse profitable locations into losses dragged by fixed overheads. On the FMCG segment, we believe the increase in production costs in the recent quarter will normalise to a lower base in the coming quarters as commodity trends have moved more favourably, which could be reflected in the near future. As utilisation rates continue to linger at c.50% levels on average, we do not foresee any need for significant capex allocation to expand production capacity in the medium term.

Post briefing, we maintain our FY18E/FY19E earnings assumptions.

Maintain OUTPERFORM and TP of RM3.15, based on an unchanged 18.0x FY19E EPS (in line with the stock’s +2SD over its 3-year forward average PER). Dividend yields for the stock could possibly register at 4.0%/4.3% in FY18E/FY19E, assuming a pay-out ratio of c.70%, which is closely in line with the group’s 2-year historical trend. This is above the group’s formal minimum pay-out ratio of 50% of net earnings.

Source: Kenanga Research - 28 Aug 2017