Oldtown Bhd’s shares have had their ups and downs since the company made its debut on Bursa Malaysia’s Main Market in July last year. Through much of the second half of last year, the stock was buffeted by rising volatility in global financial markets that saw a broad-based selloff in risky assets. The stock fell to as low as 88 sen in October — from the initial public offering price of RM1.25 — but has since rebounded to RM1.26.
We suspect the stock will fare better this year. Given the prevailing cautious market sentiment, Oldtown’s comparatively resilient business, modest valuations and yield expectations would appeal to the more risk-averse investor.Comparatively defensive business operations Oldtown is an established, and one of the most widely known, homegrown consumer brand names in the country. While the company traces its roots back to 1999, when its founders successfully formulated and commercialised their own blend of 3-in-1 instant white coffee mix, it is, perhaps, the downstream diversification into the café chain business that has raised the Oldtown profile over the last few years.
From the first café in Ipoh back in 2005, the business has grown rapidly, and today counts as one of the largest café chain operators in the country — with 183 outlets nationwide as at end-2011. The company also has 13 cafés — including fully-owned, partially-owned, franchised and licensed outlets — in Singapore, Indonesia and China.
Although the quality of food is average, the café draws customers with a reasonably priced menu of popular local offerings such as kaya and butter toast, soft boiled eggs, nasi lemak, curry mee and Ipoh chicken hor fun.
The beverage manufacturing business has been growing at a double-digit pace as well. Oldtown has gradually expanded both its product range and target markets over the years. In addition to coffee mixes, including variations of white coffee, which remains its primary income generator, the company also sells instant milk tea and three types of roast coffee powder as well as canned ready-to-drink white coffee. The roasted coffee powder products are marketed under the “Nan Yang” brand name.
These products are sold through key distributors appointed in both the local and overseas markets and are available in hypermarkets, convenience stores, petrol kiosks and other food services outlets.
Roughly 44% of beverage manufacturing sales were derived from export markets in 2010. Hong Kong is the company’s largest overseas market, where it is now one of the best-selling instant coffee brand names, second only to Nescafe. Other export markets include Singapore, Taiwan, Thailand, Indonesia, the Philippines, Australia, Canada and the US.
The café chain business accounted for roughly 61% of Oldtown’s total sales in the first nine months of 2011 with the balance coming from the beverage manufacturing operations. Oldtown intends to grow both businesses in tandem.
Expanding café chain locally and overseasThe café chain business is very scalable as testified by its track record — having grown from 75 to 196 outlets over the past four years. That is an average of 30 new outlets per year. If all goes to plan, Oldtown intends to keep up this pace of growth, with new outlets locally and overseas.
For the domestic market, the company plans to open 20 to 30 new outlets annually, half of which will be under its franchise scheme. It is also planning to test out the kiosk concept, which will focus on beverages with a limited food menu. The first kiosk is slated for opening sometime in 3Q12.
The primary concern for the company’s rapid expansion plan is competition, which is intense and growing, among Oriental-style cafes such as PappaRich, Western-style cafes like Secret Recipe, fast-food chains McDonald’s and KFC as well as a whole host of other restaurants and food stalls.
Oldtown has managed to hold its own, with its specially formulated blend of white coffee and tea beverages and a reasonably priced menu. Having said that, it will likely be increasingly difficult to maintain the degree of service and food quality over an expanding chain, which could hurt business if not well executed.
Positively, Oldtown is upbeat that it will acquire halal certification for all 183 cafés in the country before the end of this year. (The food processing centres and beverage manufacturing are already certified.) This will significantly expand its target market, which at the moment is predominantly Chinese.
The move to focus on franchising will also lower the company’s risk and capital expenditure while maintaining growth momentum. This is true for the domestic as well as overseas expansions.
In Indonesia, there are plans to open 75 outlets over the next 10 years, by a company in which Oldtown has a minority stake. For its China expansion, Oldtown signed up a master franchisee for the Guangzhou and Macau provinces last year. The plan is to open up to 175 outlets over a 10-year period. In addition, the company also expects to add two or three new cafés in Singapore annually.
Oldtown has invested in a new food processing centre, which is expected to be operational very soon, to support the China venture.
New capacity to boost manufacturing sales in 2013The beverage manufacturing business grew at an annual compound rate of nearly 42% between 2007 and 2010. Plans to broaden its export market are expected to sustain strong double digit growth for the foreseeable future.
Building on its good track record in Hong Kong, Oldtown is now targeting the mainland Chinese market as one of its new export markets. Its other new markets are South Korea and Vietnam.
Currently, the manufacturing facility for coffee and milk tea mixes is running at roughly 82% utilisation. The plant is forecast to hit maximum capacity this year. As such, Oldtown is building a new factory in Ipoh and will relocate its existing manufacturing activities there, slated by end-2012. The new facility will double its capacity by 2013, and eventually rise by up to five times to cater for demand growth for the next few years.
Steady earnings growth, modest valuations with fairly decent yieldsWe estimate the company’s underlying net profit at RM35 million this year, up some 10% from 2010, excluding net one-off gains of about RM3.4 million.
Net profit is forecast to grow by 14% to RM39.9 million in 2012 and and 17% to RM46.7 million in 2013. That implies the stock is trading at fairly modest 10.4 to 8.9 times our estimated earnings for the two years — compared with the average price-earnings ratio for the broader market and our projected growth rate for the company.
Oldtown has a minimum 50% net profit payout dividend policy. Based on our forecast, dividends would total some 5.3 sen per share for 2011, of which 2.5 sen had already been paid. Thus, a final dividend of about 2.8 sen per share is expected.
Dividends will rise to an estimated six sen per share this year, based on our earnings forecast. That will translate to a pretty decent net yield of 4.8% at the prevailing share price of RM1.26.
Including cash from the IPO, Oldtown had net cash totalling RM66.2 million as at end-September 2011. The strong balance sheet is well able to support its dividend policy as well as future expansion plans.
Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.
This article appeared in The Edge Financial Daily, February 3, 2012.