26 July 2012
Summary of Analyst Report: Oldtown Bhd fair value RM 2, Buy - OSK Research
We expect Oldtown's second-quarter results to exceed our previous estimates, coming in at RM11mil to RM12mil. These numbers are likely to be driven by stronger sales for its fast moving consumer goods (FMCG) products in China, surging 58% in first half compared with first half 2011, as well as better-than-expected food and beverages (F&B) sales due to promotions such as its newly-introduced set lunch menu.
Moving towards the end of financial year ending Dec 31, 2012 (FY12), management is guiding for an internal FY12 net profit target of some RM40mil but we believe it could surpass this target by some 5%.
We are taking the opportunity to raise our FY12 and FY13 core earnings forecasts by 6.3% and 13.4% respectively, mainly based on our expectation of a higher utilisation rate at its upcoming FMCG plant in FY13, higher average selling prices for its FMCG products, and higher average spending per customer.
We believe that its appointed distributors will substantially stock up on Oldtown coffee products next year once its new factory in Ipoh starts to cater to increasing demand, which will in turn contribute to a sharp spike in sales in first half of FY13.
Despite our positive view, our earnings revision for FY12 is minimal as we think that the company's third quarter earnings may be subdued since the period coincides with the Ramadan month, during which its F&B business experiences a seasonal slowdown versus other quarters.
Also, we do not see a significant rise in contributions from its FMCG segment as the company's existing plant is running close to full capacity (95%-96%). That said, we gather that management will beef up advertising and promotions during the quarter to boost sales. It recently introduced the “Rendang Delight Menu,” which we gather was well received.
All in all, we continue to like Oldtown's exciting growth prospects, supported by potentially major developments next year. We are reiterating our “buy” recommendation on the stock, with a revised fair value of RM2.00, as we roll over our valuation to 13 times FY13 earnings per share. Our fair value implies a potential return of 19.4% (including prospective dividend yield).