We attended  Oldtown  (OTB)’s  analyst briefing and  visited its  new plant in  Ipoh  yesterday.  The  new  plant  is  a  modern,  green  building with  an annual  capacity  of  24k  tonnes  to  cater  to  the  group’s  expanding business.  Going  forward,  we  believe  the  additional  capacity  from  this FMCG  plant  will  drive  OTB’s  growth.  Maintain  BUY,  with  our  FV unchanged at MYR2.90.

• A  plant tour  after analyst briefing.  Oldtown  (OTB)  took analysts on a tour  of  its  new  fast-moving  consumer  goods  (FMCG)  plant  in  Ipoh yesterday  after  its  analyst  briefing.  The  plant  consists  of  a  2.5-storey factory, a 3-storey administrative block and a 1-storey warehouse. The new  factory  also  has  5.6k  sq  ft  of  extra  space  to  cater  to  future expansion  needs. W e are optimistic on OTB’s  FMCG  growth  in view of its  additional  installed  capacity,  aggressive  brand  building  and appointment of new distributors in the region.
• Review  of  1HFY14  results.  OTB’s  1HFY14  sales  strengthened  on higher  revenue growth  at its  FMCG and  food and beverage (F&B) units,while core earnings were lifted by better FMCG PBT, which mitigated the softer  earnings  from  the  F&B  segment.  The  F&B  division’s  PBT  was weakened  by:  i)  higher  advertising  costs  relating  to  its  halal  campaign (+MYR1.5m-1.6m)  and  aggressive  advertising  in  Singapore  to  raise brand  awareness  (+SGD200k),  and  ii)  rising  overheads  due  to  the implementation of minimum wages for  foreign workers as well as higher overtime expenses due to  a  shortage of workers.  In  October  this year, the group  raised the selling prices of its  set menu  offerings  by 5-6% to mitigate  the  increased  costs. We expect A&P  expenses to normalise in 2H as most of the costs were realised in 1H.
• Maintain  BUY.  We  continue  to  like  the  stock’s  strong  branding, expanding  FMCG capacity and regional growth. Our FV of MYR2.90 is based  on  18x  CY14  EPS.  We  advise  investors  to  buy  into  the  recent share price weakness as we  expect  a better 2H,  buoyed  by the group’s FMCG capacity expansion. Maintain BUY.

Road Trip To Ipoh
A  day  trip  to  Ipoh.  Around  40  analysts  and  fund  managers  attended  the  analyst briefing  and  plant  tour  in  Ipoh  organised  by  OTB.  We  had  lunch  at  OTB's  new signature concept outlet located  in the city’s  M Boutique Hotel. The outlet is targeted at  higher-end clientele by  providing good services  and  a  fine dining experience. The group  plans  to  bring  this  new  concept  to  the  more  affluent  cities  of  Shanghai  and Beijing catering to the higher-end market in the future.

A modern building.  OTB’s new FMCG plant, which started production in July  this year, will  boost  its annual capacity to 24k tonnes from 8k tonnes in 2012 upon full production. The enlarged capacity will allow the group to cater to rising demand over the next five years. The plant includes a  2.5-storey factory,  a 3-storey administrative office,  a  1-storey  warehouse  and  a  2-storey  recreational  centre.  The  old  factory  in Taman Medan Becham is a standalone manufacturing facility while the new factory at the Tasek Industrial Park Ipoh is an integrated industrial complex.

Progress  in  China  operation.  The  group  has  appointed  a  local  licensed  food processing centre,  April Eight (Guangzhou) Ltd,  to manufacture the core  paste  and sauces  for  Oldtown  café  outlets  in  Guangdong  province,  which  will  commence  in 1QCY14. OTB  is also exploring  a potential partnership with April Eight to gain  better control  of  the operation.  As the opening outlets  in China  was slow  previously  due to delays  in  setting up the  group’s  central  kitchen,  we believe the appointment of April Eight will smoothen OTB’s expansion in China.

Growing  kiosk  business.  In  October,  the  group  signed  a  memorandum  of understanding (MoU) with Shell Malaysia on a non-exclusive basis to open the first kiosk  outlet  in  a  Shell  petrol  station  on  a  trial  basis.  The  first  kiosk,  which  was launched  on  1  Dec  2013,  is  located  at  Shell’s  NKVE  (North  Klang  Valley  & Expressway)  petrol  station.  We  believe  this  collaboration  with  Shell  Malaysia  is  a positive  step  given  that  Shell  Malaysia  owns  more  than  900  petrol  stations nationwide. OTB  is targeting  to have outlets in  around  10% of  the  petrol stations  in strategic locations that attract high traffic, eg in residential areas, industrial parks and intercity  expressways.  To  date,  OTB  has  opened  three  kiosks  –  in  Petronas  Twin 
Towers (KLCC), Senai Airport and Avenue K.

Financial Exhibits

SWOT Analysis

Company Profile
Oldtown Bhd produces and sells white coffee products to the households and food service industries. Its other products include milk tea and roasted coffee powder.

Recommendation Chart

Source: RHB