Wednesday, 9 August 2017

OldTown (Kenanga Research)

OldTown - Wider Serving in China

Publish date: 

OLDTOWN had entered into a Territorial License Agreement to provide a licensee the rights to operate outlets and to sub-license outlets within Shanghai, China. The move will expedite the group’s overseas café chain expansion strategies. However, we make minimal changes to our earnings estimates on limited contribution to earnings in the short-term. Maintain OUTPERFORM with a slightly higher TP of RM3.00 based on 18.0x FY18E EPS.

Larger café presence in China. Yesterday, OLDTOWN announced that it had entered into a Territorial License Agreement with Xiamen Kuaike Investment Management Company Limited (the Licensee) to operate café outlets in Shanghai, China and to sub-license the rights to other operators.

Under the agreement, the Licensee would be granted: 
(i) the exclusive right to operate café outlets within Shanghai, 
(ii) a nonexclusive right to use the Trade Mark, Trade Name, business systems to set up a network of outlets in Shanghai, China and sell approved products within Shanghai, and 
(iii) the exclusive right to grant sublicenses to other licensees in Shanghai. 

With this, the group would be paid one-off license and outlet fees alongside recurring fees via royalties. The terms of the agreement are set to be effective for five (5) years from 31 August 2017 with an option to renew for two (2) consecutive terms of five (5) years each.

We are positive on the news, as it would strengthen OLDTOWN and its brand names in the China region where most of its products are exported. Currently, the group has three (3) other outlets operating in China in the Jiangsu Province. As the local café scene is undergoing pressures from more cautious consumer spending, it made business sense for the group to expand this segment by tapping into foreign markets where sentiment is more vibrant. Further, the group’s products have demonstrated promising demand growth and strategically established outlets may be able to leverage on the existing acceptance to drive growth. Recall that FY17 FMCG sales from the Greater China region registered at RM105.2m (+46% YoY).

Minimal adjustments to earnings for now. While there are no details on the maximum number of outlets that the Licensee can operate, they have scheduled to open its first outlet by 4QCY17. In addition, we believe any contributions in the short-term may be minimal given low store base. Considering this with some minor housekeeping adjustments from the group’s audited accounts, we tweak our FY18E/FY19E earnings up slightly by 1.7%/1.8%.

Maintain OUTPERFORM with a slightly higher TP of RM3.00 (from RM2.95, previously), following our adjustment in earnings. Our target price is based on an unchanged 18.0x FYE EPS. Which is closely in line with +2SD over its 3 year forward average PER. We believe the increase is supported by similar premium ascribed by the market to other FMCG players such as KAWAN, PWROOT and SPRITZER.
Source: Kenanga Research - 9 Aug 2017

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