Share prices for Oldtown Berhad have fallen to the lowest level in over a year. This is likely due to a confluence of factors, including poor overall market sentiment, expectation of weaker consumer spending as well as selling by foreign funds.
The company has a high foreign shareholding, at about 36% currently, down from 38.2% in early-Aug. Hence, there could be more downside price pressure. Oldtown did increase its share buyback in August-September, offering some support but has since stopped.
Nevertheless, Oldtown’s underlying fundamental remains solid. Valuations are also looking more attractive. The stock is trading at 15.4 times P/E, lower than prevailing sector average of 19 times.
It has net cash of RM143 million as at end-June 2014, which is supportive of a minimum 50% net profit payout policy. We estimate net yield at around 3.2% for FYMar2015, above the sector average of 2.7%.
Net profit is likely to remain flattish this year, on the back of slower consumer spending, rising costs and competition — but should regain traction over the longer-term.
To improve sales, Oldtown is re-branding different outlets/locations to target different market segments, such as offering value meals in outlets targeting the mass market and more extensive menus for outlets catering to the higher-end consumers.
It is also looking to overseas markets to boost growth. It recently opened an outlet in Shenzen, China and plans to add several more. The first café in Australia is expected in 1H15 under a new master licensee agreement. Currently there are 237 Oldtown cafés, local and abroad, about half of which is wholly or partially-owned.
Meanwhile, it is working with key distributors in existing and new markets to expand demand for its instant white coffee products. Sales are expected to grow by 10-15% p.a. Utilisation at the new plant is estimated at 45% for FY15.
This article first appeared in The Edge Financial Daily, on October 16, 2014.