OLDTOWN 5201 rating - hold

Following OldTown’s analyst briefing yesterday, the management updated us with the current business environment as well as reviewing its 2Q12 financial results.

Within expectation – 1H12 revenue and net operating profit of the group posted at RM162.1m and RM31.9m respectively, meeting 49.6% and 53.0% of our forecast in FY12.

Better 2Q12 revenue by both divisions - Oldtown’s revenue in the 2Q12 stood at RM85.3m, up 10.9% q-o-q, on back of the encouraging revenue from the Food and Beverages (F&B) and the Fast Moving Consumer Goods (FMCG) business divisions at RM50.6m (+27.9% q-o-q) and RM34.7m (+28.6% q-o-q) respectively.

Higher advertising and promotion costs continued to weigh down the profit before tax – Despite higher revenue recorded in 2Q12, The group posted profit before tax of RM16.4m, an increase of 5.1% q-o-q, as higher advertising and promotion costs continued to pressure the group’s profit before tax.

Potential new revenue stream upon successful kiosk business model – The kiosk business model is still in the pilot testing stage, with kioks situated in heavy foot traffic in Mid Valley and KLCC shopping malls with gross expenditure per customer at a range of RM10-15. Upon successful setup, it will be developed into franchise model.Subsequently, this new business model will bring in additional stream income in terms of franchise and royalty fees.

The group has further strengthened its financial position with better net cash of RM82.14m (+13.6% q-o-q) and almost zero net gearing ratio.
The café expansion plan is on the right track to achieve 20-30 new outlets in 2012 – In the first half of 2012, The group have been opened 12 new outlets across countries in Asia Pacific, which currently meet only 40% of the total target outlets (projected to meet a targeted 216 outlets by 2012) and we are optimistic this target is achievable by year end.

The lag in commencing new factory resulting lower revenue in FMCG division in FY12-13 – According the original plan, Ipoh factory is supposedly completed in 3Q12 and start to operation in 4Q12. However, construction could not be completed in the scheduled basis, causing the group’s FMCG division losing a potential revenue of RM5.1m and RM17.6m in FY12 and FY13 respectively.
Earnings outlook/Revision

Revised F12 and FY13 revenue forecast – Despite a lower EPS forecast, we revised downward our revenue forecast for FY12 and FY13 to RM326.2m and RM363.9m respectively (down 1.56% and 4.61%) mainly due the delay in Ipoh factory construction, which supposedly to generate an additional stream revenue in FMCG division for FY12 and FY13 of RM119.3m (+4.3%) and RM143.2m (+14.1%) respectively.
Valuation & Recommendation


Revised upward our Old town’s target price from RM1.69 to RM2.23 - We revised upward our Old Town target prices from RM1.69 to RM2.23 based on 15.1 times blended P/E and forward EPS FY13 14.69 sen. This translates into a 6.7% of upside potential from the latest closing prices (RM2.09 as at 13 Sept 2012).
Rich valuation due to defensive stock nature - Following the volatile financial market, investors are taking a safe bet in customer stocks due to its defensive nature against the economic downturn, thereby we lifted our blended PE from 10.79 to 15.1 times following the increasing demand on the customer stocks lately.