Expect better servings ahead

Remain positive. We maintain our positive stance on OldTown Berhad (Oldtown) given that (1) we expect stronger results ahead and the group is on track meet our full year earnings forecasts, (2) valuation remains attractive particularly with the recent sell down, and, (3) we maintain that there is now higher chance of a special dividend of 3sen/share in view of its increasing cash pile and management?s commitment to reward shareholders. As such, we believe that the recent price weakness serves as good buying opportunities.

Optimistic of stronger 2HFY17 results. Oldtown reported 2QFY17 core net profit of RM12.7m (-3% y-o-y, -9% q-o-q), despite stronger revenue of RM99.5m on a y-o-y comparison. This brings 1HFY17 earnings to RM26.5m (+16.2% y-o-y), accounting for 45% of our/consensus full-year earnings. We are optimistic that the group will register stronger 2HFY17 results, supported by (1) continued strong performance from its FMCG business, and (2) pick up in its F&B operations.

Higher probability of 3-sen special dividend .We believe that there is a high chance of a special dividend of 3 sen/share, which is similar to the 3sen/share dividend the group declared in FY16, in view of (1) its increasing cash pile (37sen net cash/share as at 30 Sept 2016), (2) M&A may not crystallise in FY17, and (3) management has indicated that it intends to continue rewarding shareholders. A potential special dividend of 3 sen per share could raise its yield to about 5%.

Valuation

We are maintaining our BUY recommendation with a TP of RM2.15. Our TP is pegged to an unchanged PE of 16x. Stripping out net cash, our target price implies a forward PE (ex-cash) valuation of 13x.

Key Risks to Our View

Weaker-than-expected consumer spending could be a drag on its F&B business.

Source: Alliance Research - 28 Nov 2016