Oldtown - A Certain Bet in Uncertain Times

A recent update from Oldtown’s management fuels our expectation of the company’s 2QFY12 results beating our estimates. This will be underpinned by its expanding fast moving consumer goods (FMCG) business in China and better-than-expected food and beverage (F&B) sales due to promotions. We are raising our FY12 and FY13 core earnings forecasts by 6.3% and 13.4% respectively in anticipation of a sharp spike in FMCG sales in 1HFY13. Maintain BUY, but at a higher FV of RM2.00, as we roll over our valuations to 13x FY13 EPS.

2QFY12 results likely to surpass expectations. We expect Oldtown’s 2QFY12 results to exceed our previous estimates, coming in at RM11m-12m. These numbers are likely to be driven by stronger sales for its FMCG products in China, surging 58% in 1HFY12 compared with 1HFY11, as well as better-than-expected F&B sales due to promotions such as its newly introduced set lunch menu. Moving towards the end of FY12, management is guiding for an internal FY12 net profit target of some RM40m but we believe that it could surpass this target by some 5%.

Raising FY12 and FY13 estimates. We are taking the opportunity to raise our FY12 and FY13 core earnings forecasts by 6.3% and 13.4% respectively, mainly based on: i) our expectation of a higher utilization rate at its upcoming FMCG plant in FY13, ii) higher average selling prices for its FMCG products, and iii) higher average spend 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 1HFY13.

Mitigating the seasonal impact. Despite our positive view, our earnings revision for FY12 is minimal as we think that the company’s 3QFY12 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 (A&P) during the quarter to boost sales. It recently introduced the “Rendang Delight Menu”, which we gather was well received.

Maintain BUY.  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 13x FY13 EPS. Our fair value implies a potential return of 19.4% (including prospective dividend yield).

FMCG business the key driver to FY13 earnings. We are bullish on Oldtown’s FMCG business given the popularity of its drinks and strength of its brand. Nielson’s recent data showed that Oldtown saw its market share grow consistently from 2009 to 2011 in Malaysia, Hong Kong and Singapore. In Hong Kong (where it has been present for close to a decade), its market share in the coffee mix category is second only to Nescafe, which has been in Hong Kong longer. We think that the company can potentially replicate such success in China with large-scale promotions in that country’s underpenetrated coffee market.
Solid distribution network in China.  Oldtown’s products are now available at more than 1,000 distribution channels in Guangdong, Beijing and Shanghai. As its products are distributed by major names such as Walmart (operating 370 outlets in 140 cities) and RT Mart (one of China’s most successful modern trade retailers), we expect  Oldtown’s FMCG sales to soar as we see its appointed distributors stocking up substantial amounts of coffee products next year when the company’s new factory in Ipoh starts to cater to growing demand. Based on a higher estimated utilization rate and average selling prices for Oldtown’s FMCG products, we are raising our FY13 earnings estimate by 13.4%.


Source: OSK