| OldTown’s fairly resilient earnings and yields likely to attract |  |  |
| Written by Insider Asia | |||||
| Wednesday, 13 July 2011 11:12 | |||||
The company’s IPO was priced at RM1.25 per share. Some 63.4 million new shares were issued, of which 10 million were allocated for the public. This portion was oversubscribed by 10.8 times. Another 33 million shares were offered for sale by the promoters of the company and placed out to identified investors. Based on its enlarged share capital of 330 million shares, OldTown will have a market capitalisation of about RM413 million based on the IPO price. The promoters and related parties will retain a 70.8% equity stake in the company after the public offering. OldTown should fare well Based on our forecast valuations, expected yields and growth prospects, we believe OldTown should do fairly well on its listing. To be sure, investor sentiment on the broader market has been somewhat skittish in recent weeks on the back of growing external uncertainties. Several recent IPOs have also suffered heavy selling pressure on their debuts. For instance, stock prices of MClean Technologies and XOX have fallen well off their initial offer prices. Both were listed on the ACE Market without any profit track record and reported losses in 1Q11. But even the performance of profitable UOA Development has been disappointing, now trading below its IPO price. On the other hand, the listing of MSM Holdings has been far more successful. Shares in the country’s largest sugar refiner, and part of the Felda group, surged 40% on the first day of trading. The stock is now trading 66% above its retail IPO price. Not all IPOs under-perform. Investors likely warmed to MSM’s relatively defensive earnings, dominant market position, steady growth prospects and expectations for yields.
Established and well-known OldTown White Coffee brand name OldTown shares some of its characteristics. It is an established and well-known brand name, being the second largest café chain operator in the country with 171 outlets nationwide. 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 under the OldTown brand name. Today, its product range has expanded to include several instant white coffee mix variations, instant milk tea, three types of roasted coffee powder — marketed under the Nan Yang brand name — as well as canned ready-to-drink white coffee. These products are sold through a wide distribution network including hypermarkets, convenience stores, petrol kiosks and other food services outlets. OldTown products are also exported to 12 countries including Singapore, Hong Kong, Thailand, Taiwan and as far as the US. Second largest café chain operator in the country In 2005, the company expanded its operations downstream, into the food services sector by opening a chain of café outlets based on the traditional coffee shop setting and ambience under the OldTown White Coffee brand name.
Last year, the café operations contributed to about 65% of the company’s total revenue with the balance from the beverage manufacturing arm. Going forward, OldTown intends to grow both businesses in tandem. Twin pillars of growth The café chain business is very scalable and has grown from 75 to 175 outlets over the past three years. That is an average of 33 new outlets every year. As at May 2011, the company has added seven more outlets to its stable and intends to open another 27 new ones by the end of the year. This will bring the total number of outlets to 209 by end-2011. If all goes to plan, the company hopes to have a chain of about 300 outlets by 2014. About half of the new outlets are expected to be franchised. To be sure, margins are lower compared with wholly-owned outlets — royalty income is 5% of gross revenue compared with the estimated margin of 10%-15% for an average café outlet. But the franchise business model allows the company to expand quickly without straining its resources and balance sheet. To maintain consistency over the quality of food served at the café and enhance operational efficiencies, all the food ingredients are sourced and processed at three centralised food processing centres in Ipoh and Subang Jaya. Processed food is then distributed to the company’s warehouses and to the café outlets. Intense competition expected in café business Competition in the café business is intense, including from similar-themed café chains like PappaRich, other popular franchises such as Starbucks Coffee and Secret Recipe as well as the entire spectrum of food outlets. But the company believes that it can hold its own with its specially formulated blend of white coffee and tea beverages, extensive menu of local fare and most importantly, affordable prices. Some of its most popular menu items include kaya and butter toast, soft boiled eggs, nasi lemak, curry mee and Ipoh chicken hor fun. Indeed, earnings from the café operation have been rising steadily over the past few years. Revenue expanded at a compounded rate of 51.3% per annum between 2007 and 2010 while net profit grew at a slightly higher compounded annual rate of 52.1% over the same period. We expect growth to remain in the double digits, albeit at a slower pace due to the larger base effect. Expanding footprint overseas We do, however, expect the café chain operation to hit saturation at some point, probably beyond the next three years. With this in mind, OldTown is aiming to widen its addressable market base by expanding into neighbouring countries. Whilst this will inevitably carry a higher degree of risks, the company can draw on its experience thus far. Currently, OldTown has 11 café outlets — both wholly and partially-owned — in Singapore and Indonesia. Indeed, five of its 27 new café outlets planned for 2H will be located in the two countries. At the same time, the company is aiming to widen the export market for its instant white coffee and tea as well as roasted coffee powder products. On the drawing board are plans to penetrate the Iranian market by 4Q and expand further into the huge Chinese market. OldTown is currently the second best-selling instant coffee mix in Hong Kong. To cater to the expected growth in its beverage manufacturing arm, OldTown is setting up a new factory in Ipoh. When completed, targeted by end-2013, production capacity will increase by five times. The new factory will also centralise the company’s manufacturing activities under one roof to improve efficiencies. Revenue and net profit for the beverage manufacturing arm grew at a compounded rate of 41.7% and 31.2% per annum, respectively, between 2007 and 2010. Steady earnings growth, modest valuations with fairly decent yields We estimate net profit for the company at roughly RM35.4 million this year, up 12% from 2010. That is equivalent to earnings of 10.7 sen per share and prices the stock at a fairly modest 11.7 times forward P/E multiples — compared with the average valuation for the broader market of about 15 times. We believe the company can maintain a similar pace of growth over the next few years. Additionally, OldTown has adopted a dividend policy to pay out a minimum 50% of annual net profit. Based on our forecast, dividends would total 5.4 sen per share, translating into a pretty decent yield of 4.3% at the IPO price of RM1.25. OldTown has a small net debt of RM2.2 million, before taking into account net proceeds from the IPO totalling RM74.2 million, after netting off listing expenses. Thus, the company would revert into a net cash position after listing. The bulk of the proceeds — RM58 million — will be used to up its stakes in partially owned café outlets and to fund the expansion of the beverage manufacturing arm. 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, July 13, 2011. |
