Highlights

• Oldtown entered into a Territorial License Agreement with Xiamen Kuaike Investment (XKI) to operate café outlets in the Province of Fujian, China.

• As part of the agreement, XKI will be granted the exclusive right to operate café outlets within the territory and/or to grant sub-licenses in the territory to other operators.

• The term of the agreement shall be five years with the option to renew for two consecutive terms of five years, bringing the total to fifteen years, subject to the fulfilment of the conditions as set out in the agreement.

• The agreement stipulates XKI must open the first outlet within 6 months.

Comments

• We are positive on this move as the group continues its plan to expand its F&B operations regionally (note that the group recently secured a Territorial License Agreement in Myanmar). Oldtown are planning to secure further Territorial Licensing Agreements in Vietnam, Cambodia, Hong Kong and Macau in the near future. We expect Oldtown to continue to make headway in Asia (ASEAN, China and Taiwan) to exploit the region’s enormous potential and growing middle class amongst the urban population.

Risks

• Relatively elastic demand.

• Rising raw material prices.

• Occurrence of Ringgit strengthening would impact exports.

Forecasts

• Unchanged. While we are positive on the announcement of this agreement, we do not expect it to have a significant effect on earnings.

Rating

• (HOLD ; TP 2.62)

• While Oldtown’s domestic café and FMCG sales remain stagnant, FMCG exports are accelerating at a rapid pace which will provide significant revenue contributions for the group going forward. Despite this, we opine the upside is already priced in at current price levels.

Valuation

• We raise our TP to RM2.62 (from RM2.36 previously) as we take this opportunity to roll forward our valuation base year from FY03/18 to FY03/19. Our new TP is based on unchanged 17x FY03/19 EPS of of 15.4 sen. Despite our higher TP, we downgrade our call to HOLD (from Buy) as we believe the recent share price rally (which has gone up by 42% YTD) has already been reflected in its favourable earnings outlook.

Source: Hong Leong Investment Bank Research - 31 Mar 2017