Rising materials costs could cloud OldTown’s growth prospects

This article first appeared in The Edge Financial Daily, on December 5, 2017.
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OldTown Bhd 
(Dec 4, RM2.75)
Maintain buy recommendation with an unchanged target price (TP) of RM3.15 per share:
We maintain our positive stance on OldTown Bhd given that its second quarter of financial year 2018 (2QFY18) illustrates that the group, particularly its fast-moving consumer goods (FMCG) segment, is firmly on a growth path. We maintain our investment thesis that its expansion to regional markets, particularly China, offers multi-year growth potential, and valuation remains attractive despite the recent share price run-up.

The stock should trade closer to its regional peers. Our TP is higher than consensus’ as we peg Oldtown’s target price-earnings (PER) higher at 19 times, which is +1 standard deviation above its mean. As a stock with multi-year growth avenues and bright earnings prospects, we believe Oldtown deserves to trade at a higher PER. Furthermore, our target PER remains low relative to its regional peers’ average PER of 20 times. Stripping out net cash, our TP implies a forward PER (ex-cash) valuation of 16 times. 

Stronger-than-expected contributions from its regional FMCG sales should provide further upside surprises. Furthermore, management is actively pursuing mergers and acquisitions opportunities to enhance its growth prospects. 

We maintain our “buy” recommendation and RM3.15 TP, pegged at a 12-month forward PER of 19 times. The stock remains our top pick in the consumer sector. Key risks to our view include the erosion of its profit margins due to rising raw material costs, which could cloud its growth prospects. — AllianceDBS Research, Dec 4