OLDTOWN (5201) - ‘OldTown looking into M&A, organic growth’

This article first appeared in The Edge Financial Daily, on July 5, 2016.

OldTown Bhd
(July 4, RM1.91)
Maintain hold with a higher target price (TP) of RM1.95: Following OldTown Bhd’s share price gain, we believe the stock is now fairly valued with its near-term earnings potential largely priced in. We now rate OldTown as a “hold”.

We maintain our earnings forecasts, but raise our TP to RM1.95 (+10 sen) after rolling forward our valuation base to calendar year 2017 (CY17) (from the financial year ending March 31, 2017 [FY17]), tagging on an unchanged target price-earnings ratio of 14.8 times (mean).

Our earnings forecasts are unchanged, looking at 4%/6% earnings growth for FY17/FY18. We expect near-term earnings to be underpinned by: i) a gradual recovery in its food and beverage (F&B) operations; and ii) fast-moving consumer goods (FMCG) to sustain its positive momentum on an improved distribution network. FMCG export sales to China should recover in FY17, post the end of its deliberate channel rationalisation plan, which it embarked on in early CY15.

The six-month extension of the Price Control & Anti-Profiteering Regulations until end-December 2016 is neutral for OldTown, in our view. In the near term, we believe OldTown will maintain its current pricing strategy for: a) FMCG, since they continue to benefit from favourable raw material prices; and ii) F&B to gain market share. On a separate note, the impact of the minimum wage hike on July 1, 2016 on OldTown could be minimal as only about 100 staff members (out of a total staff force of 1,700 to 1,800) are currently paid below the new minimum wage.

Organic growth aside, we understand that OldTown is looking into potential mergers and acquisitions (M&A). A strong balance sheet and net cash position of RM154 million (as at end-March 2016) provide for such opportunities. As a recap, selection criteria include being complimentary to the existing business segments and within the supply chain. While M&A are on the drawing board, we believe risks could be limited by the size of the acquisition. We maintain our assumption of a 55% dividend payout ratio for now, but we do not rule out better-than-expected payouts, as it sits on a growing cash pile. — Maybank IB Research, July 1

OLDTOWN (5201) - ‘OldTown looking into M&A, organic growth’