Oldtown: Slowly And Steadily

We are taking a closer look at Oldtown’s growth outlook following updates from its management during yesterday’s analyst briefing. All in all, we continue to like Oldtown’s bright prospects, underpinned by major developments that may potentially unfold early next year. The stock’s rerating catalysts are: i) obtaining Jakim’s “halal‟ certification to penetrate the Muslim market, ii) a stronger-than-expected rollout of outlets, and iii) better-than-expected contributions from its regional business. Maintain BUY, with an unchanged fair value (FV) of RM1.66, based on its 12-month forward PER of 13x.

China FMCG business taking root. We understand that the construction of Oldtown’s new factory in Ipoh is on track and is expected to be completed by 3Q12. Given the good response to its coffee products in China so far, we think that there is upside to our FY13 forecast for the company’s fast moving consumer goods (FMCG) business. This will be driven by that country’s fast-growing middle income population, with which coffee-drinking is increasingly becoming popular. We maintain our view that revenue from the FMCG business will outpace that from its food and beverage (F&B) business as the extra capacity from the new factory will lead to a sharp spike in FY13 earnings. The company has appointed 3 distributors in China which are distributing its products in tier 1 cities such as Beijing, Tianjin, Shanghai and Guangdong.

Set lunch programme a success. Management rolled out its set lunch menu in mid-April, with prices set at RM10-RM12 for a main course and a drink. We gather that the programme has been successful so far as the lunch segment contributed to 20%-25% of total sales in 2Q12. We see a potential upside to our forward earnings estimate for the F&B business if it sustains this momentum in 3Q12 and 4Q12, as well as from the anticipated boost from obtaining “halal” certification. We are currently conservatively assuming a more muted growth in average revenue per café to RM952,000 for FY12 compared to the RM944,000 recorded in FY11.

Kiosks to take off in Sept/Oct. We gather from management that Oldtown plans to launch its first kiosk in September or October, targeting its easy-to-prepare food and beverages at the working crowd. Management plans to open an outlet each in the high traffic areas malls of KLCC and MidValley Megamall. The estimated cost of setting up a 300-400 sq ft outlet is RM200,000–RM300,000, which we deem a positive move in view of the low set-up costs and highly focused strategy targeting an untapped market, This will be backed by management’s track record of having opened more than 180 outlets in 7 years. Our initial estimates indicate that the payback period could be as short as 12-18 months, assuming an average spending per customer of RM10.

Regional expansion intact. We note that Oldtown is opening its third outlet in China in August, while the fourth should open at about the same time. In Indonesia, it is opening two new outlets this month and has secured two more locations for new outlets to be opened later this year. This will bring the total number of outlets in Indonesia to 9 this year, which is in line with our initial forecast. Management intends to open another 2 to 3 outlets in Singapore, which will adopt its new outlet concept. We see Oldtown potentially setting up its central kitchen in Indonesia once it has about a dozen outlets but this may only materialize in FY13.


Maintain BUY. Following the release of the company’s 2011 Annual Report, we updated our retrospective numbers and arrived at a lower gross profit margin of 30% (down from 32%) for FY11. We understand that certain costs linked to advertising and promotions had to be classified as cost of goods sold instead of selling and distribution expenses. Overall, we are encouraged by the fact that management’s strategic direction is intact and rolling out as planned. That said, the key risks moving forward are: i) higher cost pressure due to rising rental cost and wages, ii) inconsistency in food quality, and iii) inconsistency in service quality. Our FV is unchanged at RM1.66, based on an unchanged 13x forward earnings (50% FY12 earnings, 50% FY13 earnings) as the abovementioned adjustment does not give rise to any change in its core net profit.


Source: OSK