INVESTORS barely reacted to OldTown Bhd’s announcement two weeks ago about its move to expand to Myanmar via a licensing agreement. It could be because the food and beverage (F&B) outlet segment has seen profits gradually declining over the last few years while the fast-moving consumer goods (FMCG) segment — white coffee and other beverage products — has morphed into a rising star for the company.

Analysts covering the stock, while positive on the move, did not make too much of it as well, saying the contribution from its Myanmar venture would be very minimal.

“Well, it is a good way to go in through a licensing agreement. There is limited downside risk, but the earnings contribution will be very small. I’m a little bit surprised about the choice of Myanmar, but since the downside risk is limited, there is no harm in expanding there,” says an analyst.

OldTown’s licensing agreement with Nikmat Mujur Sdn Bhd stipulates that the latter will hold an exclusive licence to operate three outlets in Yangon for a period of three years, with non-exclusive rights to use the OldTown White Coffee trade name and trademark, operate the system, sell the approved products and provide specialised services within the city.

In return, Nikmat Mujur will pay OldTown an area licence fee of US$120,000 for the three outlets, a US$20,000 “pre-opening support fee” per outlet and royalty of US$1,500 per month for each outlet.

Notably, the profit contribution from OldTown’s F&B outlets has been dwindling over the last few years. Between FY2013 and FY2016, profit from its outlets more than halved, from RM41.59 million to RM19.88 million. Margins have also suffered, falling from an average of 10.9% in FY2013 to 7.3% by FY2016.

In contrast, profits for the FMCG segment have grown 40.7% over the same period while margins have also improved, from 14% in FY2013 to 18.7% in FY2016.

The FMCG segment has overtaken the F&B retail business since FY2014 as the largest earnings contributor to the group. As at FY2016, FMCG contributed about 71% to the group compared to F&B’s 29%.

A large part of the FMCG segment’s rising profits is attributed to the popularity of its white coffee sachets in the export market, especially China. The analyst says about 70% to 80% of the sales in China are transacted online.

According to an AllianceDBS Research report, OldTown’s second quarter ended Sept 30, 2016 (2QFY16), saw higher revenue for the FMCG segment from stronger export sales, driven by sales in China, which saw more than 200% year-on-year growth.

“We believe that the group will record stronger earnings growth in 2HFY17, driven by the fact that 3QFY16 is a seasonally strong quarter for the group. Also, the group has recognised a significant portion of its advertising and promotions expenses in 2Q and from the strong China sales on Double 11 (Singles’ Day) that fell on Nov 11,” the report says.

Hong Leong Investment Bank Research notes that on China’s Singles’ Day — the largest shopping day there — OldTown made RMB5 million in e-commerce sales, triple the amount it achieved on the same date the previous year.

Meanwhile, the café outlet business had been plagued by high operating expenses as OldTown struggles to drive traffic to its outlets amid stiffer competition. In its 2016 annual report, it says it has been consolidating and streamlining the business, closing down non-performing outlets and merging its two central kitchens to increase efficiency.

“Its café outlets have been affected by consumer sentiment. I believe the problem with Oldtown’s café outlets is that they are stuck in the middle — not seen as a brand that caters to the upper class market, nor is the price point low enough to attract the middle income crowd,” says the analyst.

As at Sept 30, 2016, OldTown had 238 café outlets — 204 in Malaysia, 23 in Indonesia, nine in Singapore, one in Australia and one in China. About 50% are franchised or licensed while the rest are fully or partially owned.

For the second quarter ended Sept 30, 2016, net profit declined 5.5% to RM12.62 million as its F&B outlet segment was dragged down by high staff cost. This was despite revenue rising 7.5% to RM99.54 million from RM92.62 million previously.

Over the last year, OldTown’s share price has increased 35.6% to RM1.92 at last Wednesday’s close. Nevertheless, analysts believe there is more upside potential given the increasing popularity of its FMCG segment.

“OldTown possesses a loyal customer base domestically, exemplified by its status at the market leader in white coffee. Its foray into Asean and China also provide potential room for growth going forward,” says HLIB Research.

Analysts’ target prices for the stock range from RM1.95 to RM2.21, with five out of six calling a “buy”. Based on OldTown’s close of RM1.90 last Wednesday, it was trading at about 15 times FY2017 earnings per share.

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