12-month upside potential
Target price 3.03
Current price (as at 12 Sep) 2.46
All cylinders fired up for FMCG
Following yesterday’s analyst briefing, our conviction on Oldtown’s growth prospect is reaffirmed as the new FMCG plant has been fully commissioned in July 2013 which will underpin this segment’s strong earnings growth going forward. Furthermore, the company’s potential move to distribute its products via a B-to-C e-commerce site in China will further enhance its growth prospect. Hence, we reiterate our BUY call on Oldtown, with an unchanged TP of RM3.03, based on 18x 12-month forward P/E. We remain positive on its long term prospects, in particular the potential contribution from China market.
1QFY14 analyst briefing key takeaways
Oldtown held its 1QFY14 analyst briefing yesterday, which was well attended by about 60 analysts and fund managers. To recap, Oldtown’s 1QFY14 core net profit grew by 3.3% y-o-y and 6.0% q-o-q respectively, mainly driven by double-digit revenue growth from the FMCG segment (both y-o-y and q-o-q), which was partially offset by weaker margin in both F&B and FMCG segments.
During the briefing, management revealed that its new FMCG plant in Ipoh has already been fully commissioned in July 2013. Currently, the group is in the midst of closing down its old factory and move all operations to the newly completed factory. This will save operating costs and ease capacity constraint that has been a drag on the contribution from the FMCG segment in 1H2013.
According to management, overseas FMCG sales have been gaining strong momentum since its new capacity kicks in in July, particularly the China and Hong Kong markets. For the month of October, the group has secured an order of 41 containers, which is 30% higher than normal.
We view this positively although management partly attributes the strong sales to seasonal factor. For 2QFY14, management aims to achieve 15% q-o-q volume growth for the FMCG segment. To recap, the segment contributes 43% and 45% of the group’s total revenue and PBT in 1QFY14 respectively.
In addition, management is working hard to finalise the vendor agreement for the operation of its virtual shop in one of the prominent B-to-C e-commerce sites in China. We are very excited on this network expansion, as we believe this is a very good strategy to drive its FMCG sales in China, apart from expanding the distribution networks via the modern on-trade channels.
On the flip side, the outlook of Oldtown’s F&B division does not seem to be very exciting, given the slow progress in setting up the crucial central kitchen in China to support its ambitious expansion plan of opening 30 outlets in China by end 2014.
We understand that the slow progress was mainly due to increasingly stringent food safety requirements by local authority following several food scandals. Nonetheless, we have factor in a conservative F&B expansion in China in our FY14 forecasts.
On Oldtown’s latest shareholding structure, we were surprised that foreign funds’ holdings remain firm at 40% as at Sept 2013, as compared to 40.6% as at 27 May 2013.
No change to earnings estimates
No change to our earnings estimates as we anticipate stronger remaining quarters.
Reiterate BUY recommendation with unchanged TP of RM3.03
As FMCG business growth is expected to pick up rapidly in the remaining quarters, we reiterate our BUY call on Oldtown with an unchanged TP of RM3.03, based on 18x 12-month forward P/E.
Again, we remain positive on Oldtown’s long term prospect in Asia, particularly the China market which we anticipate the FMCG division to grow strongly, underpinned by (1) its substantial new capacity, and (2) huge untapped coffee market in China.
Key risks include threat of the new entrants and slower than expected expansion plan.