Oldtown - OUTPERFORM: In very good shape

We attended Oldtown’s company briefing yesterday, where the turnout was extremely encouraging. We reckon that the number of participants was actually more than double that compared to the previous briefing we attended. While there was no breaking information as it was more of an introductory session to the company’s business and plans, we nonetheless went away feeling optimistic as we gather that management is still confident and steadfast in its effort to grow the company amidst the promising outlook for both the café and beverage distribution businesses. We note that institutional shareholding in the stock has also increased lately, which supports our conviction on the company’s bright prospects. Reflecting its continuing positive outlook, we are maintaining our Oldtown’s  FY12 and FY13E net profit of RM43.9m and RM51.7m, which will see the earnings growing 9.3% and 17.7%, respectively. Our OUTPERFORM call on Oldtown is reaffirmed with a TP of RM1.58, based on 12x PER over its FY12 EPS of 13.2sen. Continue to buy the stock at market, for it still offers potential strong total returns of 27.5% at the current price (capital upside of 22.4% to our TP plus gross dividend yield of 5.1%).

Rising interest in the stock. We  came  away  from  the  briefing  feeling positive as it is evident that investors’ interests are growing stronger, which reinforces our conviction buy call on the stock which we initiated with OUTPERFORM and TP of RM1.46. Meanwhile, we also observed  that the foreign and local funds have started to increase their stakes in the stock recently, and have accumulated 18.6% stake as at 23 Feb 2012. We also understand that the promoters (management and major shareholders) will no longer sell their shares in the open market and this could be a positive indication of the company’s future earnings growth. 

Comfortable with our earnings forecasts.  Currently, we have the highest forecast for FY12E net profits of RM43.9m as compared to consensus forecast of RM41.7m. We believe our estimate is achievable at this juncture as key drivers are going strong. Main drivers are the strong double digits growth rate in the FMCG segment and a moderate growth in the café chains. The strong growth of FMCG is expected to be boosted by the continuation of likely rising market shares seen across the three regions in 2012 (2011 market share gains- Malaysia: +1.2ppt; Hong Kong: +0.7ppt; Singapore: +2.7ppt),  as well as, penetration into untapped markets such as a few provinces in China, South Korea and Vietnam. Meanwhile, the management’s vision of opening more café outlets domestically and regionally should be more than adequate to sustain the moderate growth rate in the segment that we are conservatively forecasting for now. 

We are maintaining our bullish view on the company. If the economic condition normalizes with China continuing its growth trajectory, we believe there could be more upsides to our FY13E estimates. Currently, our FY13E net  profit of RM51.7m, assumes a very conservative 18.6% growth in FMCG. Our sensitivity analysis indicates that  if  FMCG  growth  hits  40%  levels,  it  will  increase  our  FY13E  earnings by 8% to RM55.7m (see below for details), which implies 7.6x Fwd PER. This strong growth of FMCG is expected to be boosted by the continuation of likely rising market shares seen across the three regions, as well as, penetration into untapped markets such as a few provinces in China, South Korea and Vietnam   

Source: Kenanga