OldTown Bhd
(Nov 27, RM1.59)
Maintain “buy” with a target price (TP) of RM2.25: OldTown’s results for the first half of financial year 2015 ending March (1HFY15) came in below expectations, making up only 45% and 43% of our and consensus full-year forecasts respectively.

The 1HFY15 revenue inched up by 2% year-on-year (y-o-y), which was within our expectations (48% of full-year forecast). Top-line growth was driven by improvement in the food and beverage (F&B) division (+4% y-o-y).

Nonetheless, operating profit was hit by higher selling and distribution costs, as well as ongoing expenditure in brand building (advertising and promotion). As a result, the group recorded an operating margin of 16% for 1HFY15, which came below our FY15 operating margin estimate of 18%.

While earnings were below expectations, we keep our forecast unchanged for now, pending more updates at the forthcoming analysts’ briefing.

We remain cautious on near-term cost pressures as we note that operating costs are rising for all consumer goods manufacturers in Malaysia.

We put our “buy” call and TP of RM2.25 under review, pending earnings review post-analyst briefing. Our existing TP is pegged to 19 times FY15 forecast earnings per share.

Risks to our call include increasing competition in the F&B segment and failure to pass on cost pressures to consumers. OldTown’s cafe chain has been challenged by small speciality cafes in the local market since 2013.

If the group fails to transform and adapt to rapidly changing consumer demand, the loss of F&B revenue will drag growth in the fast-moving consumer goods segment.

Given that raw material costs make up more than 50% of OldTown’s total operating costs, an unexpected swing in food commodity prices due to changes in climate and government regulations could result in spike in prices of its key raw materials, such as sugar, coffee beans and flour. — AllianceDBS Research, Nov 27

This article first appeared in The Edge Financial Daily, on November 28, 2014.