1H18 core net profit of RM32.0m (+21%) is within estimates. A 3.0 sen dividend was declared, also expected. The growing demand for its FCMG products in both domestic and export markets illustrates the strengthening of the group’s brand equity in both markets. Furthermore, the opening of regional café outlets could boost segment sales going forward. Reiterate OUTPERFORM and TP of RM3.15.

1H18 within expectations. 1H18 PATAMI of RM32.0m accounted for 43%/45% of our/consensus estimates. We deem the results to be within expectations given the seasonally weaker first-half period. An interim 3.0 sen dividend was declared, as expected.

YoY, 1H18 sales of RM223.5m increased by 10%, following a 22% growth in FMCG sales in both domestic and export markets. The café chain segment sales declined by 3% from lower contributions on a smaller store base (i.e. 1H18: 232 stores vs 1H17: 238 stores). However, same-store-sales growth dropped by less than 1% from the closure of less profitable stores. Group PBT grew by 17% thanks to better margins in the café chain segment from write back of provisions and better FMCG results, boosted slightly by continuing advertising efforts. 1H18 PATAMI closed at RM32.0m (+21%) after incurring lower effective taxes of 25.3% (-2.1ppt).

QoQ, 2Q18 revenue improved by 5% from better sales in both FMCG and café chain segments. We believe this is a normalisation of demand following a softer fasting season in 1Q18. However, group PBT declined by 7% owing to higher debt provisions incurred by the café chain business. 2Q18 PATAMI registered at RM15.2m (-9%) from higher quarterly tax rates at 26.5% (+2.2ppt).

Growing favour. Despite a slower-than-expected recovery in consumer sentiment, the Oldtown Coffee brand will continue to be well received in the local and foreign markets. The recovery in domestic FMCG and café chain demand demonstrates a growing preference by consumers, possibly as a more affordable venue for coffee drinkers. The group is also seen to capitalise on its brand equity in foreign markets to expand its café chain presence there. Recent outlet openings in Myanmar and Shanghai via licensee agreements could translate to exponential growth in both segments going forward. 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 results, we maintain our FY18E/FY19E earnings assumptions.

Reiterate OUTPERFORM and TP of RM3.15. Our valuation is based on an unchanged 18.0x FY19E PER (in line with the stock’s +2SD over its 3-year forward average PER). We peg OLDTOWN at a premium from its closest peer, PWROOT which we value at 17.0x FY19E PER. We believe this is fair due to the following attributes of OLDTOWN; (i) better demand growth in both domestic and export markets, (ii) flexible raw material hedging policies (i.e. 3-month forward buying against PWROOT’s 1-year price lock-in), (iii) stronger 2-year NP CAGR (i.e. 13% vs PWROOT: <5%), and (iv) ample capacity for production expansion (i.e. c.50% utilisation vs PWROOT: c.85% utilisation).

We believe the sell-down of the stock following the fire accident in its central kitchen in September is overdone as fundamentals remained mostly intact. Hence, valuation is attractive at this level. Maintain OUTPERFORM.

Source: Kenanga Research - 30 Nov 2017