This article first appeared in The Edge Financial Daily on December 4, 2017

OldTown Bhd
(Nov 30, RM2.61)
Maintain buy call with an unchanged fair value (FV) of RM3.20 per share: OldTown Bhd’s second quarter of financial year 2018 (2QFY18) results were in line as remarkable China-led fast-moving consumer goods (FMCG) revenue off the back of robust margins offset a sluggish food and beverage (F&B) segment. We maintain our “buy” recommendation and FV of RM3.20. Our FV is based on 17 times calendar year 2018 forecast price-earnings ratio (PER), which is a 20% discount to the simple PER of its FMCG peers of 23 times.

An interim dividend of three sen per share was declared. 

OldTown registered a 2QFY18 profit of RM15.2 million (quarter-on-quarter: -9%; year-on-year [y-o-y]: +20%), bringing first half of FY18 to RM32 million (y-o-y: +21%). It came in line with our and consensus forecasts at 44% and 46% of our earnings estimates respectively. 

Cumulative FMCG revenue grew 22% y-o-y, beating our estimates of 17%. Sales across all geographies with the exception of Hong Kong grew impressively. Most notably, China expanded at a breakneck 78% y-o-y for the quarter. Cumulatively, China grew 50% by our estimates, surpassing management’s guidance of a 20% to 30% growth. It was aided by improved contribution from business-to-consumer platforms, such as Alibaba. 

Surprisingly, FMCG profit before tax (PBT) margins improved for the quarter by 1.6 percentage points (ppts) to 25.4%, amid realising a 4% higher input cost. We believe cheaper sugar cost may have offset 30% costlier coffee input. Alternatively, OldTown may not have actualised its 30% costlier coffee input in its inventory. Nevertheless, cost savings realised across its value chain more than offset higher input cost, resulting in higher margins for the segment. 

F&B revenue declined by 5% y-o-y against 3% fewer stores. Going forward, we expect growth to be supplemented by a renewed regional expansion, specifically in Indonesia and China. Domestically, management looks to rejig store formats into an express ready-to-eat model. We think it is strategically positive, seeing it would rejuvenate its franchise model, highly scalable and would be less labour-intensive. 

F&B PBT margins improved by 4.9ppts y-o-y to 14.9%, largely due to a RM3 million provision of doubtful debts that was written back. This was a write-back against the RM4.5 million provision it recognised in 4QFY17. Aside from that, higher wage cost may have weighed on margins. 

We maintain our forecasts with earnings falling in line. Key risks are a slowdown in export sales, higher-than-expected advertising and promotion and government policies on foreign labour. For every RM100 hike in minimum wage, FY18 forecast earnings per share would be impacted by -1.4%. — AmInvestment Bank, Nov 3