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Thursday, March 23, 2017

OldTown’s expansion to regional markets offers multi-year growth potential

By AllianceDBS Research / The Edge Financial Daily | March 23, 2017 : 10:50 AM MYT
This article first appeared in The Edge Financial Daily, on March 23, 2017.

OldTown Bhd
(March 22, RM2.68)
Maintain buy call with a higher target price (TP) of RM3.05: We maintain our positive stance on OldTown Bhd (OldTown) given that: i) strong results in the third financial quarter ended Dec 31, 2016 (3QFY17) have reaffirmed our investment thesis that the group is firmly on a growth trajectory; ii) its valuation remains attractive despite the recent run-up; and iii) expansion to regional markets offers multi-year growth potential.

OldTown delivered a set of impressive quarterly figures. The group reported strong core earnings of RM24.4 million for 3QFY17 (+119% year-on-year [y-o-y], +92% quarter-on-quarter [q-o-q]), mainly boosted by 26% fast-moving consumer goods (FMCG) revenue y-o-y growth. We understand that the strong FMCG sales were mainly driven by over onefold revenue growth to the China market. Given that China sales still account for less than 15% of its total FMCG sales, we believe that its regional expansion story, particularly in the China market, offers OldTown multi-year growth potential.

On the other hand, management is actively pursuing merger and acquisition (M&A) opportunities to enhance its growth prospects. As such, we will not be surprised should the group announce an acquisition this year. Given that OldTown is likely to finance its acquisition with internal funds and the current challenging operating environment favours industry consolidation, we are optimistic of possibilities that a potential M&A exercise can be earnings accretive.

We maintain our “buy” call for the group with a higher TP of RM3.05 as we re-peg OldTown to a higher price-earnings ratio (PER) of 19 times (versus 16 times previously), which is one standard deviation above its mean. We believe that being a stock with multi-year growth potential and bright earnings prospects, OldTown should deserve a higher PER. Furthermore, our target PER remains low relative to its regional peers’ average of 23 times. Stripping out net cash, our TP implies a forward PER excluding cash valuation of about 16 times. — AllianceDBS Research, March 22

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