Expansion to Myanmar a minimal boost for Oldtown’s earnings
KUCHING: Analysts see minimal improvements to OldTown Bhd ( OldTown) following the announcement of its venture into Myanmar with direct license outlets in the city of Yangon.
In a li s t ing on bursa Malaysia last Friday, the food and beverage ( F& B) giant announced that its whollyowned subsidiary, Kopitiam Asia Paci f ic Sdn Bhd has executed a License Agreement with Nikmat Mujur Sdn Bhd ( Nikmat Mujur) and Low See Nam for the operation of three direct license OldTown Café outlets for a 24- month period.
In order for Nikmat Mujur to operate these out lets, thelicensee will obtain nonexclusive rights to use the OldTown trade name and marks, its developed business systems and training to sell approved products and specialised services.
For the aforement ioned rights, Nikmat Mujur would be required to pay OldTown a one- time total of US$ 150,000, a US$ 60,000 Area License fee at the end of 24 months, and a monthly royalty fee of US$1,500 per outlet for the duration of its operations.
Fol lowing this news, the research arm of Kenanga Investment Bank Bhd ( Kenanga Research) released a company update on OldTown indicating its optimism on the development as it would provide the company with a means to establish a stronger foothold in a new market.
“In addition, we believe that this will enable the group to test the brand acceptance of its product in a more cost- effective manner before considering establ i sjhing ful l - owned outlet or pursuing aggressive retail distribution,” added the research arm.
In the event that Nikmat Mujur intends to operate further outlets other than the specified three direct license out lets, a Master License agreement may be granted to Nikmat Mujur which would render them sole operators of OldTown outlets within Yangon or Myanmar.
The research arm of Kenanga Investment Bank Bhd ( Kenanga Research) believes that this would be highly probable given the stable economic growth and outlook of Myanmar’s economy as wel l as the sizeable 5.3 million population in Yagon.
Despite this optimism, there is expected to be only minimal improvement to OldTown’s earnings as the License Agreement has stipulated that Nikmat Mujur would have a 9 month construction period to establish the pilot outlet in Myanmar.
A low base of initial café outlets is also expected as the licensee, Nikmat Mujur will need time to adjust to the unfamiliar business and environment.
As such, the research arm will only be tweaking its FY18E earnings for OldTown by an immaterial increase of 0.3 per cent to account for the additional license fees revenue and expected product sales to these new licensed outlets.
Given this minimal impact on net earnings, the research arm will also be maintaining its ‘outperform’ call and target price of RM2.11 which is based on a FY18E price earnings ratio ( PER) of 15.1 times.
“Valuation is undemanding in view of the sturdy balance and strong cash flow, which will allow the company to continue rewarding shareholders with dividends.
“In addition, we believe the share price weakness since the removal of the group’s Shariahcompliant had been overplayed and may offer entry opportunity as the group’s fundamental and growth prospect remain unchanged,” concluded the research arm.