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OldTown Bhd 
(Aug 28, RM1.35) 
Maintain hold with a lower target price (TP) of RM1.30:
OldTown reported a net profit of RM9.49 million for its first quarter ended June 30, 2015 (1QFY16). The quarterly net profit declined 6.8% quarter-on-quarter (q-o-q) and 18.9% year-on-year (y-o-y). Similarly, its top-line plunged 10.5% q-o-q and 3.9% y-o-y to RM94.06 million. 

Its 1QFY16 net profit only reached 18% of our forecast and market consensus. The poor results mainly attributable to the lower earnings contribution from food and beverage (F&B) segments resulted in quarterly and yearly decline. 

Its F&B division reported profit before tax (PBT) of RM4.46 million in 1QFY16, which decreased by 9.53% q-o-q and 46.38% y-o-y. The lower PBT was mainly attributed to the lower top-line recorded for this current quarter after declining by 24% q-o-q and 15% y-o-y. The weaker sales growth owing to reduction in consumer spending during 2Q of calendar year 2015 (2QCY15) pursuant to the implementation of the goods and service tax (GST) on April 1, 2015. 

In 1QFY16, the fast-moving consumer goods (FMCG) segment expanded by 29% y-o-y in PBT to RM9.21 million. The impressive performance was backed by higher local sales generated in the current quarter coupled with lower base recorded in 1QFY15. For the quarterly basis, the division’s  PBT only increased marginally by 1% y-o-y. The softer growth was mainly due to the higher selling and distribution expenses incurred in the current quarter. 

The group is planning to open more new outlets to improve its F&B business by promoting the “lower cost” model (known as OldTown White Coffee Basic) in Malaysia with an estimated 10 new outlets for financial year ending March 31, 2016 (FY16) . We expect the expansion plan will not render immediate earnings to the group judging from the current economic condition and the prevalent tepid consumer sentiment. 

There’s possible margin erosion in relation to higher marketing costs. We are “neutral” on the group’s development plans to enhance its advertising campaigns for both the domestic and international FMCG businesses as we foresee rising marketing and advertising expenses in tandem with aggressive marketing campaigns.

Following the sluggish performance recorded in 1QFY16, we are lowering our full-year estimates for FY16 by 16% to RM43.73 million (previously was RM51.93 million). We foresee that lower domestic spending will continue to dent its F&B business with its 210 café outlets (87%) locally.

We maintain “hold” with a lower TP of RM1.30 (previous: RM1.79), based on FY16 earning per share forecast of 9.7 sen (previous: 11.7 sen) and lower blended industry price-earnings ratio of 13 times due to a challenging economic outlook ahead. 

We remain cautious on the group’s performance for FY16 following the sluggish consumer sentiment pursuant to high costs of living following GST adoption and a weak ringgit. In fact, the Malaysian Retailers Association has revised down its forecast of retail sales growth in 2015 for the third time from 4.9% to 4% in July 2015. 

Having said that, we expect the consumer sentiment will recover in the 1QCY16 as consumers will finally adapt to the GST, and hence we foresee the group’s business would perform better in 4QFY16. — JF Apex Securities, Aug 28

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This article first appeared in digitaledge Daily, on September 1, 2015.

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