OldTown Bhd
IPO price RM1.25
Not rated, fair value of RM1.50: OldTown is a homegrown kopitiam operator with the largest branch network in Malaysia and it distributes packaged coffee products across the region. Valuing the stock in line with its consumer peers at a prospective 2012 price-earnings ratio of 11.2 times, our fair value is RM1.50, or a 20% upside to its listing price of RM1.25. OldTown offers a gross dividend yield of 4.7% at its listing price.

The group commenced operations with 3-in-1 instant coffee manufacturing in 1999 under the “OLDTOWN” brand name and started exporting a year later. OldTown built its second core business in 2005 when the first OldTown White Coffee outlet was opened in Ipoh. The vertical expansion into the food services industry has been successful and today OldTown has a total of 182 outlets in Malaysia, Singapore and Indonesia, while its coffee products are exported to 12 different countries.

We like OldTown for its stable food and beverage business with visible growth prospects. While consumer preferences are constantly changing, we believe the variety of food in OldTown caters to everyone’s taste making it a preferred hang-out spot. The rising purchasing power of the younger population is positive for OldTown because they tend to hang out more often. Management targets to open another 27 (11 already) outlets by end-2011 — 22 in Malaysia, three in Singapore and two more in Indonesia.

Presently, OldTown manufactures 5.4 million tonnes of instant coffee mix and instant milk tea mix per annum at its facilities in Ipoh and Subang Jaya. Part of the IPO proceeds will go towards capacity expansion. With the plan to relocate its coffee and food processing plants in Ipoh to one central location, its logistics will be more efficient to support its extensive network.

We expect outlet expansion from café chain operations to contribute to revenue growth of 20.7% in 2011 and 15.1% in 2012. As for beverage manufacturing, we are looking at revenue growth of 17.5% for 2011 and 17% for 2012, driven primarily by higher utilisation and new capacity. Overall, we project turnover growth of 19.6% and 15.8% for 2011 and 2012, leading to decent net profit growth of 12.6% and 12.5% respectively. — Maybank IB Research, June 29

This article appeared in The Edge Financial Daily, June 30, 2011.