OLDTOWN - Aroma of Good Times

OLDTOWN (5201)

OldTown is a regional cafe chain operator (F&B) and an established beverage manufacturer (FMCG) based in Malaysia. As at FY15, the group derived 55% of its revenue from F&B and 45% from FMCG.

F&B stocks have been garnering investors’ interest due to their resilient nature, export exposure and also falling commodity prices. Besides, F&B remain challenging due to the dampened consumer sentiment post-GST implementation and series of administered price hikes.

As at 2QFY16, there are 242 outlets operating in total. Throughout 1HFY16 there were 11 new openings and 16 closures and renovations. Of the 242 stores 87% are located in Malaysia.

PBT jumped 21% q-o-q on the back improved share of profits from its Singapore café outlets despite a marginal increase of 1% in revenues qoq. There are currently 9 café outlets in Singapore with 2 more slated to commence operations by end FY16.

The groups’ promotional activities have centered on value inducing purchases such as their “RM10 value meals” promotions. Moving into 2HFY16, its value inducing pricing strategy and discounting is expected to persist to attract customers. YTD revenues per outlet are down circa 12% on a yoy basis.

1HFY16 revenues grew by 11.1% on the back of double digit growth in modern trade in the 3 key markets which are M'sia, HK & S'pore. Taiwan has emerged as another key market for the group in recent times. PBT grew by 17%, aided by the stronger USD. Recall that their exports are priced in USD.

Its exports to China registered a slight decline y-o-y on the back of their distribution rationalization; however this is not reflexive of a drop in demand for OTWC products. Walmart has been signed on as a key player in their modern trade channel. Walmart has 450 stores across China.

Margins would be supported by prudent cost management, which saw packaging materials cost decrease by 8% y-o-y, meanwhile the full commissioning of the automation of their packaging line end 3QFY16 will reduce direct labor expenses in the long run.

Besides, its strong balance sheet position with net cash of RM151.0m (32.6 sen/share) provide further room for higher dividend pay-out which estimated at 6.0 sen/share and 6.5/share (yield: 4.3% & 4.6%) for FY16E & FY17E, respectively, based on a conservative pay-out ratio of c.52% vs 4-year’s average of 55%. Potential dividend yield might exceed 5% if the Group pays 60% of its earnings.

Kenanga Target price given RM 1.76

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