OldTown likely to continue rationalising operation of non-performing stores
KUCHING: OldTown Bhd (OldTown) is believed by analysts to likely continue to rationalise operations of non-performing stores and allocate resources into more profitable locations.
According to the research arm of Kenanga Investment Bank Bhd ( Kenanga Research), with the signing of licensing agreements in Myanmar and China during the year, OldTown is set to widen the group’s café chain outreach across the regions.
Kenanga Research noted that during the first quarter of 2018 (1Q18), two new outlets have been opened in Myanmar as the firsts in the country with a pipeline of outlets to be launched in Shanghai, China in the coming quarters.
“However, we believe the group will continue to rationalise operations of non- performing stores and allocate resources into more profitable locations,” the research arm said.
It added that the net impact could results in an immaterial net store growth in financial year 2018 (FY18).
Kenanga Research believed the OldTown Coffee brand will continue to be well received in the local and foreign markets, given the increasing reception of the group’s products across the regions.
The research arm noted that while the café chain same-store sales growth (SSSG) continues to record expansion, persistent monitoring is still necessary as shifts in economic landscape could reverse profitable locations into losses dragged by fixed overheads.
On the fast-moving consumer goods (FMCG) segment, Kenanga Research believed the increase in production costs in the recent quarter will normalise to a lower base in the coming quarters as commodity trends have moved more favourably, which could be reflected in the near future.
As utilisation rates continue to linger at circa 50 per cent levels on average, the research arm did not foresee any need for significant capital expenditure ( capex) allocation to expand production capacity in the medium term.
Post OldTown’s 1Q18 results briefing, Kenanga Research maintained its FY18E- FY19E earnings assumptions.
Kenanga Research also maintained its ‘outperform’ rating and target price of RM3.15 per share, based on an unchanged 18-fold FY19E earnings per share (EPS).