• For every 1-ppt of the 10% service charge being passed down to its employees, earnings could be impacted by MYR1m.
• However, we believe OTB could limit the impact by either raising prices, reducing expenses or both.
• We maintain our earnings forecasts pending further developments. Maintain BUY with an unchanged MYR2.15 TP.

What’s New

Effective 6 Apr, restaurants and hotels are not allowed to impose service charge unless they have employer-employee collective agreement in place. Dato’ Sri Alias Ahmad (Domestic Trade, Cooperatives and Consumerism Ministry Secretary General) said this is a temporary measure until the government comes out with a way to regulate the collection of service charge. We understand that the government is considering issuing service charge certificates (similar to the Halal certificates) to regulate the matter.

What’s Our View

Oldtown does impose a service charge of 10% at its food and beverage (F&B) outlets (217 stores in Malaysia, end Dec 2014). Also, it does partly share the service charge with its employees. Oldtown has since display service charge signages in its café outlets, in line with the new “industry practice”. The question now is whether all will need to pass down in full, the 10% service charge to their employees; this will impact their bottomlines directly. Unknown to us is the extend that Oldtown now shares the 10% service charge with its employees. Oldtown derived MYR116m revenue in FY3/14 from its owned café’ outlets. Every 1-ppt additional service charge pass down to its employees (on top of what it presently shares) could impact profits by MYR1m pa, we estimate. However, we believe that Oldtown could counter this by either increasing prices of its F&B items, reducing expenses (eg. employee benefit expenses, ~14% of revenue) or both.

We maintain our earnings forecasts and TP pending further developments. Our TP is pegged to 18x 2016 PER.

Source: Maybank Research - 15 Apr 2015