INVESTMENT HIGHLIGHTS

• 1HFY18 earnings below expectation

• Café chain operation still in the red

• Manufacturing of beverages’ performance driven by export

• Reaffirm NEUTRAL stance with a revised TP of RM2.60

Below expectations. Oldtown’s 2QFY18 earnings came in at RM15.2m which brings its 6MFY18 earnings to RM32.0m. After taking into account exceptional items of RM3.1m, cumulative normalised earnings came in at RM28.9m lagging expectations, accounting for 43.% and 41.0% of our and consensus’ full year FY18 earnings forecasts respectively. Against last year, earnings rose by +20.4% while on a quarterly sequential basis, earnings dropped at -9.2%qoq. The weaker than expected 2QFY18 performance was due to the slower than expected recovery of the café chain operation while this is mitigated by the strong performance of the manufacturing of beverages’ segment.

Café chain operation still in the red. The café chain operation’s revenue dropped by -5.0%yoy to RM46.4m while the profit before tax (PBT) dropped at a faster pace of -24.2%yoy to RM3.4m. The segment’s lower PBT against last year was due to the fewer number of outlets in operation domestically as a result of the group’s restructuring effort to close non-profitable outlets. Currently, there are 189 outlets in Malaysia in comparison to 198 outlets in operation in FY17. In addition, the group has also opened additional outlets in China, Singapore, Indonesia and Myanmar in effort to diversify its income stream. Nevertheless, the recovery of the café chain operation’s performance from these restructuring efforts is slower than expected.

Manufacturing of beverages’ performance driven by export. The manufacturing of beverages’ revenue and PBT increased significantly by +33.7%yoy and +42.8%yoy. This is mainly due to the growth in revenue of both local and export sales by +16%yoy and +25%yoy respectively in the 1HFY18. The strong double-digit growth was achieved despite the escalating input costs due to the weak Ringgit.

Currently, export accounts for 64% of the total segment revenue. Nevertheless, in lieu of the stronger Ringgit, we estimate that the growth of this segment will taper down in the coming quarters as the stronger Ringgit will have a stronger downside impact on export sales than the benefit gain from a lower raw material costs.

Dividend declared. For the quarter, OldTown proposed its first interim dividend of 3sen per share.

Impact to earnings. Post earnings announcement, we are revising our FY18F and FY19F earnings forecasts down by -10% and -17% respectively due to the: (i) slower than expected recovery of the café chain operation and; (ii) the stronger Ringgit will have a stronger downside impact on export revenue than the benefit gain from a lower raw material costs.

Designated as a Shariah Compliant security. The Securities Commission has on 23 November included 33 new stocks, including OldTown, into the list of Shariah Compliant Securities.

Reaffirm NEUTRAL stance with a revised TP of RM2.60. We are maintaining our NEUTRAL call on Oldtown with a revised TP of RM2.60 per share (previously RM3.10). Our valuation is premised on FY19 EPS of 13.0sen 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 - 30 Nov 2017