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).

Source: www.thestar.com.my

Oldtown’s new plant to start ‘brewing’ in Q3

OLDTOWN Bhd, the “kopitiam” chain operator, expects to begin operations at its new factory in Ipoh by the third quarter of this year.

Executive director Clarence Leon D’Silva said the new factory will increase its current manufacturing capacity by five times.

“This is to cater to the expected higher demand for our beverages and new products over the next few years,” D’Silva said.

He said the overall investment for the factory is about RM38 million.

In an interview with Business Times recently, D’Silva said Oldtown is expanding its operations in China.

“We plan to set up a new food processing plant in Guangzhou as part of our expansion plan to penetrate the booming growth of China’s food and beverage market,” he said.

The company also plans to open two to three new outlets and explore licensing opportunities this year while in Indonesia, it plans to open five to eight new outlets this year.

“We will still maintain our strategy to open 20 to 30 new outlets annually,” D’Silva said.

OldTown currently has 183 outlets in Malaysia, eight in Singapore, four in Indonesia and one in China, bringing the total to 196.

By 2015, the cafe chain operator is targeting to open up to 300 outlets to expand its coverage locally and overseas.

Moving on, D’Silva said Oldtown is exploring the idea of setting up kiosk-based outlet to assist new franchise owners with startup costs to meet rising property prices and rental cost.

According to D’Silva, OldTown has already identified a location in Kuala Lumpur to start its first kiosk.

“We have been working on the kiosk operations for a while now and are attempting to roll out the first kiosk by the third or fourth quarter this year,” he said.

The kiosks are only for the Malaysian market and will not be replicated overseas, D’Silva said noting that its branding in China and Indonesia is more upmarket and leans towards the restaurant rather than the café concept.

D’Silva said Oldtown expects to achieve double-digit growth in net profit and revenue this year.

“We remain bullish on a double-digit growth for the full year,” he said.

For fiscal year 2011, the company posted a net profit of RM40 million on revenue of RM285 million.

Source: www.btimes.com.my

OldTown to deliver growth and yields in the long run

Investor interest in café operator, OldTown Bhd (RM1.46) has perked up in recent days. This could be due to a variety of factors, including the company’s relatively defensive business profile, upbeat prospects for earnings growth and yields as well as fairly modest valuations.

The company’s normalised net profit (after adjusting for one-off and other items) grew an estimated 15% last year, and we believe a similar double-digit earnings growth rate is sustainable for the foreseeable future. That compares well against the stock’s prevailing valuations.

The stock is trading at roughly 11.2 times our estimated earnings for 2012 and 9.6 times for 2013. In addition, shareholders will earn dividend yields estimated at 4.5% to 5.2% for the two years. While its shares may consolidate in the near term, following a good run-up, OldTown should see more upside in the long run.

Double-digit earnings improvement is expected from both the company’s key business units — the café operation and beverage manufacturing.

Plans to open 30 to 40 new cafés

OldTown added 21 outlets to its café chain in 2011, bringing the total to 196, including those in Singapore, Indonesia and China. This was slightly off the pace of an annual net add of 33 outlets on average in the previous three years, and is likely due in part to the company’s restructuring and listing exercise in mid-2011. However, OldTown fully intends to pick up the pace going forward.

For the current year, the company plans to add 20 to 30 new outlets locally, about half of which will be opened under its franchise scheme, which allows it to expand quickly and gain market share without overtaxing the balance sheet.

At the same time, the company is in the process of applying for halal certification for all 183 cafés in the country, hopefully before the end of this year.

It has secured certification for some 25 outlets to date. The food processing centres and beverage manufacturing are already certified. If successful, this will significantly expand its target market, which at the moment is predominantly Chinese.

For overseas expansion, two or three new outlets are planned for Singapore and and five to eight in Indonesia. A second outlet in Guangzhou, China, opened in March 2012.

Recall that OldTown signed up a master franchisee for the Guangzhou and Macau provinces last year. The target is to open some 36 cafes by 2015. A new food processing centre in Guangzhou, in which OldTown has a 19% stake, is planned by end-2012. In addition, the company is exploring the possibility of appointing licensees for other provinces in China to further expand its footprint. Licensing, like the local franchise model, limits the company’s investment risk.

In all, we are likely to see 30 to 40 new outlets per year, locally and overseas, going forward. The new outlets and organic growth — same store growth is estimated to average some 2% to 3% — are expected to underpin a 15% to 20% annual earnings growth.

Beverage manufacturing has a huge target market

The café chain accounted for roughly 62% of OldTown’s total revenue in 2011, with the balance coming from the beverage manufacturing arm. The latter is also expected to grow in tandem for the foreseeable future.

OldTown is estimated to have over 42% market share in the instant white coffee mix segment domestically. While it will likely continue to fare well, the higher growth potential should come from exports, which currently account for half of the company’s beverage manufacturing revenue.

The OldTown brand of instant coffee mixes has done particularly well in Hong Kong, where it is ranked second in terms of market share, and Singapore.

Building on its success, OldTown has pushed into the mainland Chinese market, where the potential demand is much larger. Initial sales figures have been encouraging. Its products are sold through three distributors via major retailers such as Walmart, Jusco and Carrefour in coastal cities including Beijing, Shanghai and Guangdong.

The company has also set its sights on two other coffee drinking countries in the region, South Korea and Vietnam. Statistics suggest that per capita coffee consumption in South Korea is five times the average for the Asia-Pacific region and double that of Malaysia, and growing, driven by the younger generation of consumers. Vietnam is one of the world’s largest exporters of coffee beans but consumption has been lagging and therefore presents good growth potential.

With a much larger addressable market, OldTown believes the beverage manufacturing business can maintain growth at a high double-digit clip. Sales grew at an average compound growth rate of nearly 34% per year in the past three years.

The manufacturing facility for coffee and milk tea mixes was running at roughly 83% utilisation at end-2011 and is expected to hit maximum capacity this year. To cater for the expected growth, OldTown is in the process of building a new factory in Ipoh, which will double the existing capacity once it is up and running, slated for 3Q12. Capital expenditure is estimated at some RM48.7 million, for infrastructure and machinery. The facility can be expanded further to up to five times the current level by adding more production lines at fairly marginal cost.

Modest valuations should translate into further gains

We estimate net profit at RM43.2 million this year, up 18% from our estimate of normalised earnings of RM36.6 million in 2011, and further expand to RM50.4 million in 2013. That implies the stock is trading at a price-earnings ratio of roughly 11.2 times 2012 and 9.6 times 2013 — fairly modest compared with the prevailing consumer sector’s average valuations.

Based on the company’s minimum 50% net profit payout ratio, dividends per share are estimated at 6.5 sen and 7.6 sen per share for the two years. That translates into pretty attractive net yields of 4.5% to 5.2% at the current share price.

Certainly there are risks, even though the sector is generally viewed as relatively resilient. Consumer spending is expected to remain quite robust. However, it could weaken if the global economic growth outlook deteriorates significantly or if inflation eats into disposable incomes.

The rapid expansion in OldTown’s café operations also raises difficulty in terms of quality control. Deterioration in food quality or poor service at even a few outlets could hurt the brand name and sales across the whole chain. Furthermore, competition in both the café chain and beverage manufacturing is intense and consumer preferences can be very fickle.

On balance though, we suspect that OldTown should continue to perform fairly well over the next two to three years. Its balance sheet is strong with net cash totalling RM72.6 million as at end-2011.

Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.

Source: www.theedgemalaysia.com