OldTown’s FY15 (Mar) core earnings of MYR47.5m slightly missed our and consensus estimates. Maintain NEUTRAL, with a lower TP of MYR1.66 (FY16F P/E of 15x, 2% upside) after we trim our FY16-17 earnings forecasts. The FMCG business was the saving grace for the year, with revenue and PBT up 3.1% and 6.0% YoY respectively. A single-tier final dividend of 3 sen per share was declared.

• Below expectations. OldTown’s FY15 earnings were below our and consensus expectations, reaching 96.5% and 95.2% of estimates respectively. Revenue rose by a mere 4.1% YoY, as its food and beverage (F&B) and fast-moving consumer goods (FMCG) divisions only recorded sales growth of 4.8% and 3.1% respectively. Meanwhile its EBIT decreased 3.7% YoY to MYR64.0m, as the overall margin fell to 16.1% (-130bps YoY). Accordingly, net profit slipped 3.0% YoY to MYR47.5m. Sequentially, 4QFY15 net profit of MYR10.2m fell 29.2%,mainly from a goodwill write-off at its F&B division amounting to MYR3.5m.
• Core segments. Although the F&B division’s sales growth was higher than its FMCG arm, the former’s PBT declined 16% YoY, reflecting negative operating leverage at the F&B business. Meanwhile the FMCG segment remained the earnings driver for OldTown, with PBT expanding 6% YoY due to lower selling and distribution expenses incurred, in spite of the slower sales growth.
• Forecasts and risks. We trim our FY16/FY17 earnings forecasts by 5.0%/5.6% respectively. We anticipate the operating environment in the F&B industry to remain challenging on intensifying competition as more independent cafés are opened. We also introduce our FY18F estimates. Key risks to our earnings include weaker-than-expected consumer sentiment, increasing competition and higher raw material costs.
• Maintain NEUTRAL with a lower TP. We trim our TP to MYR1.66 (from MYR1.80), pegging its revised FY16F EPS to an unchanged P/E of 15x. We continue to believe that growth in both its core segments of F&B and FMCG could remain soft amid stiff competition in a challenging operating environment. As such, we are of the view that the stock deserves to trade at a discount to its peers (target valuation of 19-22x), given its more modest earnings growth on offer.