Analysts positive on Oldtown’s acquisition of Advance City
PETALING JAYA: Analysts believe Oldtown Bhd’s acquisition of the remaining 30% equity interest in Advance City Ltd (ACL), could strengthen its fast-moving consumer goods (FMCG) segment, which mitigates the more challenging food & beverage industry.
Kenanga Research expects the FMCG division to spearhead Oldtown’s earnings growth moving forward in anticipation of a 14.6% sales growth in FY16, supported by its dominant position in key markets, including Singapore, Hong Kong and Malaysia as well as the normalisation of export sales.
“We believe investors should angle Oldtown as a growing FMCG play, which can offset the earnings volatility risk of the more challenging retail F&B sector,” it said.
Oldtown has entered into an agreement to acquire the remaining 30% equity interest in ACL for RM15.5 million via the issuance of 9.64 million new shares at RM1.61 each. ACL is involved in the trading and distribution of coffee products in Hong Kong, Macau and Guangdong, China.
Hong Leong Investment Bank (HLIB) Research said the acquisition is positive to Oldtown’s earnings as the leakage from the unowned 30% stake would be clogged and attributed back to Oldtown post-acquisition.
Based on HLIB Research’s calculations from the filing disclosure, ACL’s FY15 net profit stands at around RM5.6 million. Assuming that FY16 net profit remains constant, there will be an increase of RM1.69 million or 3.4% to Oldtown FY16 net earnings and beyond. Earnings per share, meanwhile, is expected to increase 1% to 10.7 sen.
HLIB said the acquisition valuation of 9.2 times price-to-earnings ratio implies a 61% discount to the Oldtown’s current PE of 15.1 times, which is earning accretive.
The acquisition, HLIB said, will give Oldtown complete control of ACL’s operations, thus allowing it to dictate the marketing and distribution plans and future strategic directions for the Hong Kong and Greater China operations.
“We see this as an extension of the group’s consolidation of its distributions network and channels in the Chinese market. This is in line with the group’s strategy to grow its FMCG segment sales in the region,” it added.
Although China’s economy is going through a slowdown, HLIB Research opined that it is by and large a huge market, and there is still ample room for the group to grow in China over the long term, it said.
It is maintaining a “buy” call on Oldtown, with a higher target price of RM1.87. The stock was unchanged at RM1.65 last Thursday.