This article first appeared in Corporate, The Edge Malaysia Weekly, on May 23 - 29, 2016.

AFTER declining 16% this year, the valuation of OldTown Bhd — a homegrown fast-moving consumer goods (FMCG) and food and beverage (F&B) player — is starting to look attractive again. In fact, its trailing price-earnings ratio (PER) of 14 times is lower than that of some of its regional peers.  

As at last Wednesday, the stock had dropped to RM1.39 from its close of RM1.657 on Jan 14, which put its PER at 14.14 times. By comparison, Singapore-listed FMCG company, Breadtalk Group Ltd, was trading at 40.14 times and Thailand-listed Oishi Group at 18.92 times. 

After stripping out OldTown’s cash — the group was in a net cash position of RM137.5 million as at Dec 31, 2015 — its PER stands at 10 times. According to Bloomberg data, the company offers an indicative dividend yield of 4.3%.

Interestingly, the trading volume of OldTown’s stock shot up at the beginning of last month. Some 1.47 million shares changed hands on April 4, which was a 610% increase from the 206,800 shares traded on April 1. 

The 1.47 million shares also represented a steep rise from the 52-week average volume of 430,799 shares done. Trading volume has since dropped with between 30,000 and 80,000 shares traded from May 11 to 18. 

“The stock is cheap. It is one of the few stocks in the FMCG and F&B segment that are trading at a steep discount,” says an analyst at a local banking group who covers the stock.

“There is no exact comparison for its business model and segment. However, compared with other players in the F&B and FMCG industry, OldTown’s valuations are attractive,” he adds. 

OldTown started out manufacturing coffee and other beverages, including instant coffee mix and instant milk tea mix, and marketing these locally and in 13 foreign markets. 

In 2005, it ventured into operating cafés and as at Dec 31, 2015, had 245 of them in Malaysia, Singapore, Indonesia, China and Australia. 

In the meantime, Breadtalk has F&B brands such as Toast Box, Din Tai Fung, Bread Society and Carls’ Junior in its stable while Oishi Group is involved in the Japanese restaurant business and beverage market through brands that include Oishi, Fruito and Sparkling Green Tea.

Potential catalysts and headwinds

Analysts say a potential catalyst for OldTown is the possibility of a special dividend sweetener or an M&A exercise, given its cash pile.

“Management is considering declaring a special dividend to reward its shareholders. At the present time, we have estimated a DPS of six sen, which provides a 4% yield. A potential special dividend of three sen per share could raise its yield to 6%. We are comfortable that its current net cash position of RM137 million (30.5 sen per share) will be sufficient for the group to meet both potential special dividends and M&A activities,” says Alliance DBS Research in a Feb 29 report. 

“Although its F&B operation remains challenging, we understand that the business is stabilising and should improve q-o-q. At the same time, management is actively pursuing M&A opportunities to enhance its growth prospects. Thus, we will not be surprised if the group announced an acquisition this year. Given that OldTown is likely to finance its acquisition with internal funds and the current challenging operating environment favours industry consolidation, we are positive any potential M&A exercise will be earnings accretive for the group,” the report adds. 

The local research house has a “buy” call on the stock and a target price of RM1.70.

Sources say OldTown recently engaged investment bankers to help the group look at undertaking a corporate exercise that could potentially include the entry of a new substantial shareholder or even a privatisation exercise. 

However, OldTown did not respond to questions sent by The Edge on the matter.

An analyst contacted by The Edge notes that like most companies in the sector, OldTown is not sheltered from headwinds such as weak consumer sentiment and rising costs. 

“The group is aware of the challenges and is putting in place a number of things to help it ride out the storm. For example, it is looking at cost savings on its F&B side, such as consolidating its plants. This exercise is expected to bring about more than 30% cost savings,” he says.

Maybank Investment Bank Research has maintained its “hold” call on the stock and recently trimmed its target price by five sen to RM1.40. 

“Assuming slower FMCG sales recovery in the China market and possibly weaker domestic F&B operations on general weaker consumer demand and higher operating costs, we lower our earnings forecasts by 4%/7%/3% for FY16/17/18 respectively,” it states in a Feb 29 report. 

It adds that there may be several new developments this year that could affect OldTown and the F&B industry as a whole. These include the monthly minimum wage rising to RM1,000 from RM900 in July in the peninsula and to RM920 from RM800 in Sabah and Sarawak. 

“However, the impact on OldTown could be minimal as only about 100 employees [out of a total workforce of 1,700 to 1,800] are being paid less than the new minimum wage currently,” the Maybank IB report says. 

“Higher foreign worker levies, although deferred, are another risk to earnings with an estimated 60% to 70% of OldTown’s total workforce comprising foreigners. To mitigate the effect of such new regulations, OldTown may consider converting some of its cafés into semi self-service. This will help reduce its labour cost.”

In its financial year ended March 31, 2015 (FY2015), the group’s total revenue rose just 2% year on year to RM397.7 million while net profit fell 2.9% to RM47.5 million. 

OldTown’s earnings are still on a downward trend. In its nine months ended Dec 31, 2015, the group saw revenue dip 3.9% y-o-y to RM288.9 million while net profit fell 11.8% to RM34.2 million, partly due to an increase in tax expenses.  

Net profit margins have also been narrowing, from 14.09% in FY2011 to 11.86% in December 2015. 

OldTown’s café business used to be its main source of revenue, contributing 55% to consolidated revenue in FY2015, while beverage manufacturing accounted for 45%. This trend seems to have reversed with the latter contributing more to the group’s revenue in its nine months ended Dec 31, 2015.

According to Bloomberg data, three analysts have a “buy” call on the stock while four have “hold” recommendations. The 12-month consensus price stands at RM1.55.

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