Kenanga: OldTown strategies lead to healthier cafe chain sales

PETALING JAYA: OldTown Bhd’s strategies have proven effective, leading to healthier cafe chain sales per outlet and better fast-moving consumer goods (FMCG) performance in both domestic and export markets, says Kenanga Research.

The group recorded RM45.6mil in the first quarter of FY 2018 (Q1FY18), which was flattish from the previous year. However, there was higher same-store-sales growth (SSSG) as the group had fewer operating outlets during the quarter, after trimming less profitable stores in Malaysia.

The group is looking to widen its cafe chain outreach across the region, with new openings in Myanmar as well as a pipeline of outlets to be opened in Shanghai.

Kenanga Research said it believed the rationalisation of non-performing stores could result in an immaterial net store growth in FY18.

The research house noted that local demand has moved away from a state of stagnancy, stimulated by improved marketing efforts and new initiatives to enter the e-commerce space. The Greater China region continued to dominate export proportions, accounting for 45% of total FMCG sales.

Kenanga Research expected the group to continue expanding its potential demand base and leverage on favourable forex exposures from operating in this segment.

“We believe the Oldtown Coffee brand will continue to be well received in the local and foreign markets, given the increasing reception of its products across the regions. While café chain 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 FMCG segment, we believe 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 c.50% levels on average, we do not foresee any need for significant capex allocation to expand production capacity in the medium term,” it said.

Kenanga Research maintained its “outperform” call on OldTown with an unchanged target price of RM3.15 based on an unchanged 18 times FY19 estimated earnings per share.

Dividend yields could possibly register at 4%/4.3% in FY18/FY19, assuming a payout ratio of about 70%, which is closely in line with the group’s two-year historical trend.