OldTown remains defending champion in a growing market

by **Cals** Mon 17 Mar 2014, 12:43

Business & Markets 2014

Written by Alliance Research

Monday, 17 March 2014 10:45

OldTown Bhd
(March 14, RM1.90)
Maintain buy with target price of RM2.35: OldTown’s core profit for its third quarter ended Dec 31, 2013 of financial year 2014 (3QFY14) grew 22.1% year-on-year (y-o-y) and 15% quarter-on-quarter (q-o-q), underpinned by: (i) consistently strong fast moving consumer goods (FMCG) sales (+36.2% y-o-y, +6.0% q-o-q), which were partially offset by higher advertising and promotion (A&P) expenses; and (ii) profit before tax margin recovery in food and beverage (F&B) division (from 8.8% in 2QFY13), thanks to 5% to 6% hike in October 2013.

During its 3QFY14 results briefing, management revealed that the weaker profitability (-260 basis points q-o-q) in the FMCG division was mainly due to lumpy A&P expenditure as the group had implemented an aggressive marketing campaign in Hong Kong during the quarter. Hence, margin is expected to be better in 4QFY14.

Management also shared with us the latest market research from AC Nielson which indicated that OldTown as the market leader (first in the white coffee segment and second in the total coffee mix segment) in the instant coffee market had lost some market share in 2013.

Nonetheless, this was within management’s expectation as the strong white coffee wave (consumers switching from classic coffee to white coffee) has led to many new brands entering the segment, which only accounts for 35% of the total coffee mix market.

While competition remains stiff, management intends to maintain its premium pricing strategy to differentiate its brand from that of its competitors.

Going forward, we anticipate the group’s earnings growth to be underpinned by the FMCG segment, for which we project sales volume growth of 20% per annum coupled with improved profitability due to: (i) improved economies of scales as the plant is currently running at low utilisation rate of 40% to 43%; and (ii) better profitability (potentially 40% higher than its existing distribution channel) via e-commerce sales as the group is now ready to tap into the huge business to consumer (B2C) online market in China by launching its first flagship online store in TMall.com, a leading B2C e-commerce portal in China, next month.

With regard to Oldtown’s F&B division, we remain conservative with the assumption of 4% to 6% revenue growth per annum, underpinned by outlets expansion in the Asean markets.

As we anticipate increased competition in both the F&B & FMCG segments, we trim our earnings by 4% to 5% per annum to take into account higher A&P cost. Post-adjustments, we foresee earnings to grow 7%, 13.9% and 20.1% in FY14, FY15 and FY16.

We reiterate our “buy” call on OldTown with a lower target price of RM2.35 (-4.1%), based on unchanged target price-earnings ratio of 18 times for FY15 earnings. We remain positive on Oldtown’s long-term prospects in Asia, particularly the China market. — Alliance Research, March 14

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This article first appeared in The Edge Financial Daily, on March 17, 2014