Monday, 19 June 2017

(The Edge Financial Daily) China market still the upward catalyst for OldTown

Despite 4Q profit slump, eight research houses raise their TP on the stock


KUALA LUMPUR: High expectations of better earnings that were not met in OldTown Bhd’s final quarter of the financial year ended March 31, 2017 (4QFY17) resulted in a selldown of its shares after the company’s quarterly results were released on May 25.

Consequently, the stock, which hit an all-time high of RM3.40 on May 22, has slumped near 20% since. It was last traded at RM2.73 last Friday, following the 46% year-on-year (y-o-y) decline in net profit to RM9.91 million in 4QFY17, as both its cafe and beverage operations dragged, though revenue inched up 2% y-o-y to RM106.96 million.

Still, the share price is about 52% higher than it was a year ago, when it was trading at RM1.80 on June 10, a clear indication of the strength of investors’ optimism about the company. And interestingly, all eight research houses that cover OldTown have raised their target price (TP) on the stock to between RM2.75 and RM3.20 after the 4QFY17 results were announced.

Areca Capital Sdn Bhd chief executive officer Danny Wong for one does not expect OldTown’s earnings to continue to fall. He also pointed out that OldTown’s dismal 4Q was due to one-off expenses, such as provision and restocking of consumables, rather than any major headwinds.

“Since they are venturing into overseas markets, I’m expecting better top line [and] earnings results for the next few quarters,” he told The Edge Financial Daily.

Likewise, AmInvestment Bank analyst Philip Wong noted that the RM4.76 million provision for the quarter that OldTown posted was just due to the company’s precautionary write-downs of its food and beverage (F&B) operations in Singapore.

“We still like OldTown for its export-driven growth, market leader [position] as [the] No 1 white coffee brand in all its core markets and outstanding operational track record,” said Wong in a research note dated May 29.

He also highlighted that the company’s fast-moving consumer goods (FMCG) sales in China registered a robust 71% y-o-y growth during the quarter. “It was growing stronger than we [had] expected, spearheaded by online growth. As a result, we double our China sales forecast to 40% for FY18. As of FY17, China’s FMCG contribution was close to 25% of [the company’s] total FMCG sales,” said Wong.

Though Wong noted that the outlook for OldTown’s local F&B operations remains soft, he was “pleasantly surprised” by its foreign store expansion outlook in China and Myanmar. “It will be about a licensing basis, resulting in minimal risks to OldTown, in our opinion,” Wong added.

Th e research house is also positive about the doubling of Old-Town’s capital expenditure in FY18.

“The incremental spending is expected to improve its FMCG operational efficiency through further automation and is expected to be completed in 3QFY18,” said AmInvestment Bank.

Despite the disappointing 4QFY17, OldTown registered a full-year (FY17) net profit of RM60.77 million, 16% higher than RM52.27 million in FY16, driven by the group’s manufacturing of beverages, which recorded double-digit growth in both revenue and profit before tax. Revenue grew 8% to RM425.2 million from RM393.41 million as it exported more beverages and benefi ted from foreign exchange gains.

Though Etiqa Insurance & Takaful research head Chris Eng forecast that 1QFY18 may not be looking that good for OldTown in terms of quarter-on-quarter sales growth due to the Ramadan month, he too remains positive about longer-term prospects for the company.

He told The Edge Financial Daily that OldTown’s profits should trend up on a y-o-y basis, with better profits expected in the coming quarters, driven by better sales in overseas markets, especially Hong Kong and China. In particular, he said Southeast Asian F&B, especially coffee, are getting more popular among the Chinese, breaking the traditional Chinese tea drinking habit. Hence, he expects OldTown to garner more sales in China. Kenanga Research analyst Clement Chua, who has a TP of RM2.95 on OldTown based on 18 times its FY18 price-earnings ratio (PER), said the valuation of OldTown is justified, as highly export-exposed FMCG players tend to trade at a premium. “We believe the group could leverage on its solid foothold in the Greater China market towards exponential growth, given its significantly larger population base and consumer spending habits,” said Chua in a May 29 note.

However, following the 4QFY17 results, JF Apex Securities Bhd downgraded the stock to “hold” from “buy” on May 26, albeit with a higher TP of RM2.83, based on an FY18 PER of 19 times.

“Despite maintaining our positive view on the group’s FMCG division, as underpinned by the management’s efforts to strengthen its presence in local and overseas markets for its white coffee brand, we think the share price has priced in all the positive factors with the current steep valuation,” it said.

While maintaining its forecast for FY18, the research house also introduced its earnings forecast for FY19, which implies a net profit growth of 3.8% y-o-y, as it reckoned that OldTown’s FMCG division will continue to do well, driven by overseas expansion, particularly in China, and strong marketing strategies.

Meanwhile, in initiating coverage of OldTown last Friday, with a “neutral” recommendation and a TP of RM2.90, MIDF Research noted that OldTown’s products are well supported by over 100 China online retailers across three key e-commerce platforms: Tmall, and “We are positive about OldTown’s strategy to ride on China’s online and offline sales platforms as this will significantly improve customer reach of its products,” it said in a report.