OLDTOWN has received a pre-conditional cash offer from Jacobs Douwe Egbert Holdings Asia NL. B.V. at RM3.18 per share. 51.45% of the majority shareholders have accepted the offer. This will progressively lead to the privatisation and delisting of OLDTOWN shares, subject to the fulfilment of its terms. We deem the offer price to be fair as it is within our unchanged Target Price of RM3.15 based on 18.0x FY19E PER. ACCEPT OFFER.

Cash Offer for OLDTOWN Shares. Yesterday, OLDTOWN received a pre-conditional cash offer for its shares by Jacobs Douwe Egberts Holdings Asia NL. B.V. (the Offeror). The offer price of RM3.18 per share represents a 10.4% premium on the last closing price at RM2.88 and amounts to a total cash consideration of RM1.47b. 51.45% of the group’s stakeholders have agreed to accept the abovementioned offer.

Privatisation on the way. The Offeror is a privately owned company incorporated in The Netherlands, which has a global coffee and tea business. Going forward, the Offeror aims to delist OLDTOWN shares and privatise the group to enable better management flexibility. In relation to this, OLDTOWN would make an announcement in the event that the Offeror receives acceptances resulting in the Offeror’s ownership of 90.0% or more in OLDTOWN. Upon which, the trading of the shares will be suspended immediately for five (5) market days from that trading date. Subsequently, the Offeror would commence the delisting process of OLDTOWN.

Pre-conditional terms. The Offeror is required to fulfil the following pre-conditions, being: (i) the and acceptance by the Competition Commission of Singapore and the Commission having issued a decision allowing the consummation of the Offer without conditions or on conditions reasonably satisfactory to the Offeror, and (ii) make the necessary applications and attain clearances from relevant anti-trust authorities. Note that these terms have to be satisfied by the stop-date of 11 August 2018.

We are positive on the news, as it demonstrates the growing brand equity of the home-grown “Oldtown” brand in the global F&B scene. The group has in the past year expanded its café chain outlets to Myanmar, Indonesia and to re-establish the presence in China. On the manufacturing business, the group’s instant coffee powder mix saw strong reception in the export markets (particularly in the Greater China Region) to overtake domestic sales contributions. With the added connections made available by the Offeror, the group’s internationalisation could be further accelerated. However, this would render investment opportunity in OLDTOWN out of the public reach.

Post announcement, we make no changes to our earnings estimates.

ACCEPT OFFER as Offer Price of RM3.18 is slightly higher than our 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 the premium valuation 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). As the offer price is reasonable and trails closely with our target price, we recommend investors to accept the offer. Our call on the stock was OUTPERFORM previously.

Source: Kenanga Research - 12 Dec 2017