Yesterday, OldTown (OTB) announced that its wholly-owned subsidiary, Old Town (M) SB, has acquired a 70% stake in Advance City Ltd (ACL), Hong Kong.

Deal worth HKD67m. OTB will buy up 1.4m shares, representing 70% of ACL’s issued and paid-up share capital, for a cash consideration of HKD67m (~MYR26.8m), on a ‘willing buyer willing seller’ basis. The acquisition will be funded by the proceeds raised from OTB’s private placement, which was completed on 21 Dec 2012.

Strengthening FMCG foothold in China. ACL is mainly involved in the trading and distribution of coffee products in Hong Kong, Macau and  Guangdong. Upon completion of the deal, OTB will be able to take control of  the company’s current distribution network in China to maximize its sales  potential. We believe the group will be able to strengthen its marketing and  distribution operations by participating directly in ACL’s pricing, marketing and branding strategy post-acquisition.

Positive contribution from the deal. This deal is expected to contribute positively to group earnings. If the acquisition had taken place on 1 Jan 2012, the profit contribution from ACL would have come to approximately MYR4m.

Maintain Buy. The acquisition is likely to be completed around June this year. The additional earnings contribution from ACL will bump up our FY14 numbers by 3.7%. Accordingly, we revise our FV to MYR2.82 as we roll over our valuation to 15x FY14 EPS. Maintain BUY.

Source: RHB