OldTown  (OTB)’s 1QFY14  results  were  largely  in  line  with  consensus and  our  estimates.  We  expect  a  stronger  2HFY14,  driven  by  its  FMCG capacity  expansion.  1Q14  revenue  and  core  earnings  rose  6.9%  and 9.9% y-o-y, thanks to the better numbers at the group’s FMCG segment. Upgrade to BUY, with our FV unchanged at RM2.90.

-  In  line.  1Q  revenue  grew  6.9%  y-o-y,  bolstered  by  healthy  revenue growth  from  both  the  food  and  beverage  (F&B,  +2.6%  y-o-y)  and  fast moving  consumer  goods  (FMCG,  +13.6%  y-o-y)  segments.  Core earnings rose 9.9% y-o-y to MYR12.2m, from MYR11.1m, mainly driven by  stronger  FMCG  performance. FMCG’s PBT rose  6%  y-o-y  on  solid topline growth, with additional profit contribution from newly acquired HK subsidiary, Advance City Ltd. Despite the higher revenue, F&B’s PBT fell 5.4% y-o-y as the implementation of minimum wage jacked up operating costs.  Versus  the  preceding  quarter,  revenue  and  core  net  profit  rose 3.2% and 4.3% respectively, buoyed by decent sales growth.

- Higher  operating  cost  bites  into  margins.  OTB’s higher operating costs led to its EBIT margin trending lower by 1.7ppt to 17.5% y-o-y and PBT margin contracting to 17.2% from 19.2%.  

- Expansion full steam ahead. The group, which has a total of 225 cafés, plans to open more outlets domestically and overseas, eg in Singapore, Indonesia and China. OTB’s new FMCG plant, which began operation in June,  will  boost  its  annual  capacity  to  24k  tonnes  when  it  reaches  full production.  The  enlarged  capacity  will  allow  the  group  to  cater  to  rising demand over the next five years.

- Forecasts.  As  OTB’s 1Q14  results  were  in  line,  we  are leaving  our forecasts  unchanged.  The  key  investment  risks  include:  i)  volatile commodity prices, and ii) weaker consumer spending.

- Upgrade  to  BUY.  Upgrade  to  BUY  with  MYR2.90  FV,  based  on  18x CY14  EPS.  We  are  upbeat  on  OTB’s outlook  in  view  of  aggressive expansion of its F&B outlets and start of production at its FMCG factory in  Ipoh.  After  the  recent  share  price  correction,  the  stock  is  currently trading at an undemanding 15.5x FY14 P/E.

Source: RHB