Trade Wise: An increasingly crowded market for OldTown

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The company is keeping up with the times, diversifying its distribution channels to include business-to-consumer e-commerce portals for product distribution. - Photos by Patrick Goh

OLDTOWN BHD has been on a bumpy ride in recent times. The café chain operator, which also manufactures premixed white coffee sachets, has found itself operating in an increasingly crowded market amid weakening consumer sentiment.  

Currently, the company has 237 outlets in Malaysia, Singapore, Indonesia and China. Its premixed coffee beverages are distributed in Asean as well as China, Hong Kong and Taiwan.

OldTown’s shares have been on a downward trend in recent months, shedding 22.68% as at last Thursday’s close of RM1.72 from their year-high of RM2.23 on June 23. They recovered last Friday, gaining 2.6% to close at RM1.76.  

The price weakness, say analysts, indicates that it could be time for investors to take a second look at the stock. Some, however, beg to differ, given the challenging operating environment.

RHB Research analyst Fong Kah Yan feels that the weakness could be due to anticipated weaker second-quarter results in November. “Unless the company can show double-digit growth in its net profit, I believe the shares will remain flattish at this level.”

Kenanga Research’s Soong Wei Siang believes the price weakness could be due to foreign institutional shareholders taking profit in recent months.

Filings with Bursa Malaysia reveal that one of OldTown’s substantial shareholders, Franklin Resources Inc, started trimming its stake in mid-August. As at Sept 22, the investment house held 6.42% equity interest in the company. American institutional fund Artisan International Small Cap Fund started paring down its stake in June and ceased to be a substantial shareholder on Sept 17.  

Many believe the food and beverage market has reached saturation point. Also, OldTown will have to fight to stay relevant as consumers tighten their purse strings with the increasing cost of living and the introduction of the Goods and Services Tax next April.  

An analyst with a local research house says same-store sales growth for OldTown’s outlets was below 2% in the last nine months — a problem faced by not only OldTown but also other café operators.

“It is consumer sentiment that is affecting the market. The F&B market is slow and there is a lot of competition. The latest Consumer Sentiment Index (for the second quarter of 2014) recovered slightly but at 100.1 points, it is barely there,” says RHB Research’s Fong.

OldTown said in its quarterly results announcement in August that it will open more outlets in Malaysia this year. The company was not available for comment at press time.   

Signs of stress caused by a crowded market and weaker consumer sentiment could be detected in its first-quarter results ended June 30, 2014. While revenue rose 7.25% from the previous corresponding period to RM97.85 million, net profit contracted 4% to RM11.7 million due to higher sales and distribution expenses.

The outlet segment contributed RM8.32 million, or 54%, to profit before tax for the quarter while the beverage manufacturing segment contributed RM7.13 million, or 46%.

Nevertheless, SJ Securities mentions in its report that it is not particularly concerned about OldTown’s first-quarter performance as the three months have historically been its weakest every year.  

Alliance DBS Research believes the company’s sales and distribution expenses should normalise during the rest of the year due to seasonal factors.

While the near-term domestic outlook for OldTown appears uninspiring, analysts see long-term potential in its overseas operations, particularly in China. The company encountered some problems in its central kitchen operations there but these are being ironed out with a new joint-venture partner.  

“China is not an easy market. It will take time and I believe it has long-term potential,” says RHB Research’s Fong.

Kenanga’s Soong concurs, saying the company has bright prospects in China, although management has to get its strategy right. Success in China will be a game-changer for OldTown, he says.

OldTown has also made headway in Asean markets. In Indonesia, it has executed a second master licence agreement with its local partner and plans to open six to eight more outlets there  this financial year. Expansion via licensee agreements allows the group to keep its capital expenditure low.

In its financial year ended March 31, 2014, some 108 of OldTown’s outlets were franchisees, 20 were partially owned and 21 licensed. The company ran the remaining 89 outlets.

Meanwhile, it is planning to penetrate the Australian market and is expected to open its first outlet there in the first quarter of 2015.

OldTown’s premixed coffee business has gained in popularity in China, Hong Kong and Taiwan. There is no breakdown of revenue from premixed coffee from these three countries but its 2013 annual report discloses that the “other Asian countries” geographical category — which includes Hong Kong, Taiwan and China — contributed 19% to full-year revenue.   

Interestingly, the company is keeping up with the times, diversifying its distribution channels to include business-to-consumer e-commerce portals for product distribution.

“If it manages to execute this well, it could become a vital distribution means. China is a big country and it has the potential to grow quickly,” says a fund manager.

OldTown said in its quarterly report that it plans to strengthen its foothold in Asean and will intensify its marketing efforts in Indonesia and the Philippines with the help of established distributors. It has also appointed an international distributor in Thailand and appears confident of its prospects there. “Overall, the group is bullish on the growth potential in these Asean countries,” it said.  

At RM1.76, the stock is trading at a historical price-earnings ratio of 16.3 times, which is lower than that of its peers such as Berjaya Food Bhd (36.05 times) and Singapore-listed Breadtalk Group Ltd (27.95 times).

According to Bloomberg data, there are seven “buy”, one “hold” and one “sell” calls on the stock and an average target price of RM2.21.

This article first appeared in The Edge Malaysia Weekly, on October 06 - 12, 2014.