Friday 29 Mar 2024
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KUALA LUMPUR: Things may finally be looking up for OldTown Bhd, which saw its OldTown White Coffee chain of cafes plagued by higher labour costs and dampening consumer sentiment, as well as weaker exports in its fast-moving consumer goods (FMCG) segment in its first half ended Sept 30, 2014 (1HFY15).

As a result, OldTown’s (fundamental: 3.0; valuation: 1.3) FMCG division reported a profit before tax of RM9.72 million in the second quarter (2Q) of FY15, down 12% year-on-year, dragged down by lower sales from the segment’s overseas market, according to JF Apex Research in a note in November.

“They did not do well in the first quarter ended June 30, 2014 [1QFY15], due to longer approval times for product labelling and Food and Drug Administration (FDA) registrations in Indonesia, China and Hong Kong, as well as a restructuring of its distributorship that resulted in delayed shipments to Sabah and Sarawak and China.

“However, these issues should have been addressed by now,” AllianceDBS Research vice- president for equity research Cheah King Yoong told The Edge Financial Daily over the telephone.

The weaker financials, however, have caused its share price to drop by one-third from a near one-year high of RM2.26 in June last year to RM1.50 early this month.

But more recently, OldTown’s substantial shareholders — foreign fund management companies US-based Franklin Resources Inc and Canadian-based Mawer Investment Management Ltd — have started raising their stakes in OldTown, which is seen as a sign of their confidence in the company’s outlook.  

Over the past two weeks, Franklin Resources acquired 5.81 million shares in OldTown, raising its equity interest in the company to 7.06% from 5.74%. Mawer picked up an additional 3.29 million OldTown shares, which raised its stake in the food and beverage group to 9.19%.

OldTown’s share price reacted favourably to the announcements, rising 18 sen or 12% to RM1.68.

“OldTown’s valuation is cheap compared with its regional peers. It is trading at a price-earnings ratio [PER] of about 14.31 times compared with a regional PER of 28.5 times.

“It is especially attractive to foreign fund managers because it is well-positioned to tap into the Asian consumption growth story,” said Cheah. OldTown is also AllianceDBS’ sole “buy” call in its coverage of the consumer sector — which the research house is “underweight” on.

Kenanga research analyst Soong Wei Siang concurred that the F&B operator’s current low valuation is a factor attracting foreign institutional investors.   

“In terms of valuation, OldTown is quite attractive at this juncture as its share price has retracted a fair bit since last year,” he said, adding that it should be seeing a recovery of its FMCG exports performance in the following two quarters.  

“We also wouldn’t rule out the possibility of fund money moving to other places from the oil and gas slowdown,” Soong added on OldTown’s share rally.

Maybank IB Research, in a note to clients on Dec 6, had opined that OldTown should see a pick-up in revenue on the export front, as the delays it faced with regards to FDA registration and China orders are now behind them.

“What was also encouraging is that OldTown’s revamp of its domestic distributorship (to Yee Lee Corp Bhd) has resulted in a 140% jump in distribution points, while new regional distributors have been appointed to spearhead growth in markets such as Indonesia,” said analysts Desmond Ch’ng and Liew Wei Han in the report.

Kenanga’s Soong also noted that OldTown’s FMCG or beverage manufacturing segment should be more robust compared to its restaurant business on the back of poor consumer sentiment, with the impending implementation of the goods and services tax (GST).

“[However] we understand OldTown is executing aggressive promotions to boost sentiment in the short run in conjunction with the year-end school holidays and Chinese New Year, and this should contribute to better performance,” he said.

OldTown closed one sen or 0.6% lower at RM1.66 on Friday, bringing its market capitalisation to RM742.79 million.

 

The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Go to www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Financial Daily, on January 19, 2015.

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