9M18 PATAMI of RM43.6m (-14%) is below our estimate due to higher production and distribution costs incurred in 3Q18. No dividend was declared, as expected. FMCG exports appear to be slowing down while domestic demand is picking up. Expansion of café chain outlets in overseas locations should help mitigate the poorer demand seen locally. Reiterate ACCEPT OFFER and TP of RM3.18.

9M18 results below expectations. 9M18 PATAMI of RM43.6m is below our/consensus estimates, making up 59%/63% of our/consensus full-year estimates. Negative deviation was due to higher-thanexpected raw material costs exposure as well as marketing and distribution expenses during the 3Q18 period. No dividend was declared as expected.

YoY, 9M18 sales of RM338.2m (+6%) grew thanks to a 14% growth in FMCG sales in both domestic and export markets. The café chain segment sales fell by 3% despite a larger store base (i.e. 9M18: 237 stores vs 9M17: 234 stores) likely due to a more immature store portfolio with recent openings. In the meantime, same-store-sales growth only declined by 1% as less profitable stores ceased operations. Group PBT declined by 14% owing to recent higher production and distribution expenses. 9M18 PATAMI registered at RM43.6m (-14%) subsequently.

QoQ, 3Q18 revenue was flattish at RM114.6m as better café chain sales (+3%) was offset by a slight decline in FMCG performance (-1%). Group PBT declined by 22% from the higher production costs and marketing spend during the quarter, which we believe was mainly driven by the FMCG export efforts. 3Q18 PATAMI closed at RM11.6m (-24%) from higher effective taxation at 28.7% (+2.2ppt).

Wind of change? The latest results demonstrated a first meaningful decline for the group. Much was expected from its FMCG export business, especially in the Greater China market, but it may have either reached a point of saturation or is facing new competition. While domestic demand for FMCG products has recovered, local café chains are still challenged by cautious consumer when it comes to spending on eating out. Foreign café operations continued to expand their network, at the meantime, with the recent opening of outlets in Myanmar after the signing of the licensing agreement there. Expansion into foreign markets could help buffer the impacts of weaker domestic consumer spending while enhancing its brand presence internationally.

Post results, we trim our FY18E/FY19E earnings by 12.4%/6.3% as we tone down our growth expectations and margins from both segments.

Reiterate ACCEPT OFFER and TP of RM3.18. With our revisions to earnings, our indicative target price is lowered to RM2.95 (from RM3.15, previously) based on an unchanged 18.0x FY19E PER (in line with the stock’s +2SD over its 3-year forward average PER). Given that this is below the pre-conditional cash offer price of RM3.18 by Jacobs Douwe Egberts Holdings Asia NL. B.V. for the privatisation of OLDTOWN, we maintain our call.

Risks to our call include: (i) abortion of privatisation deal, (ii) lowerthan-expected consumer demand, (iii) slower-than-expected completion of new chain outlets, and (iv) higher-than-expected cost exposures.

Source: Kenanga Research - 28 Feb 2018