INVESTMENT HIGHLIGHTS

• Café chain operation’s performance improved despite fewer outlets

• Manufacturing of beverages’ performance impacted by higher operating costs.

• Reaffirm NEUTRAL stance with revised TP of RM3.10

Café chain operation’s performance improved despite fewer outlets. Recall that the group’s earnings rose by +20.6%yoy to RM16.7m contributed by the café chain operation’s PBT increased of +49.2%yoy to RM6.45m. Nevertheless, the improvement in the segment’s performance yoy is very much attributable to the write back of the provision of doubtful debts of RM3.1m during the quarter. Management explained that the segment’s performance was commendable as it was achieved on the back of significant reduction in number of outlets due to its restructuring efforts (As of 2QFY17: 231 outlets). They informed that despite the current local market condition, there are still untapped opportunities and due to this, they plan to open at least eight new outlets. Internationally, the key markets it will focus on for the short and mid-term will be China and Indo-China markets.

Manufacturing of beverages’ performance impacted by higher operating costs. The manufacturing of beverages’ PBT dropped marginally to RM15.5m (a dropped of -0.1%yoy). Nevertheless, this is still within management expectation as it still managed to maintain the same quantum of PBT in comparison to the corresponding quarter despite the higher material costs. The export market continues to be the driver with 64% contribution to total sales. Dissecting the sales by regions, the Greater China continues to be the segment largest revenue contributor with 45% contribution to total sales as the sales growth from mainland China posted a +14%yoy. Despite this, management expects that the sales from China will normalise going forward due to the higher base effect. In addition, input costs has increased by an average of +6.6%yoy mainly attributed by the surged of raw materials prices across all major ingredients and we expect that this will continue to depress margins.

Impact to earnings. Post briefing, we do not make any changes to our forecasted earnings as it is still in line with our expectations.

Reaffirm NEUTRAL stance with a revised TP of RM3.10. We are maintaining our NEUTRAL call on Oldtown with a revised TP of RM3.10 per share (previously RM2.90) as we roll forward our valuation based year to FY19. Our valuation is premised on FY19 EPS of 15.7sen pegged to FY19 forward PE of 20x. Our target is based on market capitalisation weighted forward PE of Oldtown’s peer in the F&B and FMCG segment.

Source: MIDF Research - 28 Aug 2017