Oldtown - Hot and still brewing!

We attended Oldtown’s company briefing yesterday, where the turnout was extremely encouraging. We 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 manufacturing businesses. We also note that foreign institutional shareholding in the stock has also increased substantially in the past seven months, which supports our conviction on the company’s bright prospects. Thus, our earnings growth forecasts are maintained at 9-18% for FY12-13E respectively. However, as the total return of the stock is slightly above 10% only, we are maintaining only a  MARKET PERFORM call on Oldtown with a TP of RM2.26. Our valuation is based on an unchanged PER of 14.5x over its FY13 EPS of 15.6sen.  

Strong foreign shareholdings. Foreign fund shareholdings in the company have grown substantially in the past seven  months, rising from only a 4.0% stake in February 2012 to 19.7% in September 2012. We believe this is one of the major factors that has been driving the stock to rerate itself from a Fwd PER of 9.5x to 14.0x, where  the share price has surged 65.0% since February 2012. Note that the stock is still tightly held by the top 20 shareholders with an aggregate holding of 81.3%. Moreover, we understand that the major shareholder (who owns 50.1% of the stock) will not sell his shares in order to maintain his controlling stake. 

Huge untapped market. Currently, about 85% of the clients of Oldtown café are generally non-Muslim. This is because the  company has only 86 certified Halal outlets in Malaysia to cater to the Malay population, which constitutes 67.4% of the 28.3m population. Thus, the company is accelerating the process now to get all its outlets certified by the end of this year, and this will allow the company to advertise  and promote its Halal status to the untapped market, which we believe this strategy will have a positive impact to the company’s future earnings growth.  

Expecting dividend in 3Q12. The company has not declared any dividend for FY12. We believe the company will at least distribute a 2.5 sen interim dividend per share during its third quarter results, and a final dividend thereafter for the year of 4.1 sen (likely to be announced after the 4Q results). Based on a 50% payout, we estimate the total net DPS of 6.6 sen for FY12, representing a 3.2% dividend yield for the year.      

Forecasts maintain. Fundamentally, we remain positive on the company given its two key drivers; 1) the strong growth of  its FMCG which is expected to be boosted by growing regional market shares, including untapped markets in China, South Korea and Vietnam  and 2) its vision of opening more outlets in Malaysia, Singapore, Indonesia and China. As such, we are maintaining our earnings forecasts growth of 9%-18% for FY12-13E.

Reiterate MARKET PERFORM with a TP of RM2.26. Our valuation is based on an unchanged PER of 14.5x over its FY13 EPS of 15.6 sen. Our applied PER is slightly below the +2 SD to its average PER since listing.

Given a string of merger and acquisition activities within the consumer sector and rising interest in the stock, we reckon  the stock is still likely to continue being rerated higher going forward.

Source: Kenanga