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Friday, November 25, 2016

Brokers Report: OldTown Bhd-On the right path

Maintain BUY with unchanged target price (TP) of RM2.21


  • OldTown’s 2QFY17 net profit declined 9.0% q-o-q and 5.5% y-o-y to RM12.63mil. Meanwhile, quarterly revenue down 3.2% q-o-q while climbed 7.5% y-o-y to RM99.55mill.
  • For 1HFY17, net profit was registered at RM26.51mill, up 16.1% y-o-y. Similarly, revenue up by 8.4% y-o-y to RM202.43mill.
  • Within expectation- The Group’s 1HFY17 net profit was within expectations by accounting for 47% of our full year net profit forecast and market consensus mainly buoyed by positive performance in FMCG division coupled with slight recovery in F&B division in this quarter. We reckon that OldTown could achieve impressive earnings in 2HFY17, aided by better performance from both divisions in conjunction of Christmas and Chinese New Year celebrations.


  • Better earnings of 1HFY17. The Group’s 1HFY17 net profit posted a positive growth amid its higher topline as the resilient performance of FMCG segment was strong enough to offset the fall in F&B segment in 1QFY17. Nonetheless, for quarterly basis, net profit declined for both yearly and quarterly basis mainly due to weaker result in FMCG segment in 2QFY17 amid higher selling and distribution expenses during this quarter.
  • F&B division remained lacklustre in 1HFY17. The segment recorded a decline of 10% PBT for 1HFY17 mainly attributable to the lower earnings achieved in 1QFY17 owing to reduction in consumer spending as weaker sales recorded in Ramadhan fasting month which came earlier as compared to last year. Similarly, PBT for 2QFY17 declined by 15.8% y-o-y amid higher staff costs and depreciation in this quarter.
  • Better growth shown by F&B division for quarterly basis. Nonetheless, F&B division managed to report PBT of RM4.54mil in 2QFY17, rising 4.9% q-o-q and in line with increase in revenue of 7.2% q-o-q, backed by aggressive promotional campaigns which launched from July to Sept 2016. We reckon that slight improvement in consumer sentiment as compared to last quarter also supported the earnings for the division.
  • Encouraging performance of FMCG division in 1HFY17. FMCG segment expanded by 39.7% y-o-y in PBT for 1HFY17. The resilient performance was aided by higher
export sales generated with double-digit growth as well as positive impact from the stronger US Dollar versus the Ringgit coupled with cost saving initiatives, especially on packaging materials and direct labour expenses.
  • Nonetheless, for 2QFY17, the division’s PBT recorded a decrease of 22.3% q-o-q amid negative growth in its topline. The sluggish performance was owing to the higher selling and distribution expenses incurred in the current quarter as well as seasonal factors. In addition, the weaker demand from local business also attributed to the negative growth in this quarter.
  • Dividend declared. The Group has declared a dividend of 3.0 sen in 2QFY17 which will go ex on 25 Jan 2017. We expect the total dividend payout of 6.3 sen per share will be given by the group for FY17F or equivalent to yield of 3.1%.
  • Future prospects. FY17 will be another challenging year for the group amid potential rise in cost for raw material coupled with increment of foreign workers’ salaries. Despite the challenging and competitive business environment, the group will continue to implement its future growth plan to strengthen its earnings growth going forward. For its F&B division, more new outlets will be opened in the forms of `generic’ outlets and low cost model (known as OldTown White Coffee Basic) as well as focusing more on family segment to attract more customers. In addition, the café operations will continue to serve a better quality of foods and beverages for its business in foreign markets including Singapore, Indonesia, Australia and China to strengthen its brand name beyond Malaysia.
  • For FMCG segment, the group will continue to sustain its impressive growth by improving its manufacturing efficiency to drive cost savings and hence lifting its margin. The group will brush up its marketing activities to promote their products in domestic market as well as international market in order to maintain its market share and dominant position in the white coffee segment in Malaysia.

Earnings Outlook/Revision

  • We maintain our earnings forecast for FY17-18F.

Valuation & Recommendation

  • Maintain BUY with an unchanged target price of RM2.21, based on FY17 EPS forecast 13 sen with blended industry PER of 17x. We are sanguine on OldTown’s expansion plans as we believe the group is able to strengthen its brand name in international market over the medium to long term.

Source: JF Apex Securities Research - 25 November 2016

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