oldtown berhad initiate with - midf equity beat friday, 16 june 2017 4 synergistic value gain...

MIDF RESEARCH is a unit of MIDF AMANAH INVESTMENT BANK

Kindly refer to the last page of this publication for important disclosures

16 June 2017 | Initiate Coverage Oldtown Berhad Initiate with NEUTRAL Overseas market to deliver future growth Target Price (TP): RM2.90

INVESTMENT HIGHLIGHTS

• We initiate coverage on Oldtown Berhad (Oldtown) with a

NEUTRAL recommendation and TP of RM2.90 per share

• Our valuation is based on PER18 of 20x pegged to EPS18

of 14.5sen

• FMCG segment to drive growth through export

• Synergistic value gain through vertical integration

Company businesses. Oldtown Berhad is principally engaged in the

business activities of: (i) Operation of café chain (F&B segment) and;

(ii) Manufacturing, marketing and sales of coffee and other beverages

(FMCG segment). It invented the White Coffee category in 1999 and

since then specialises in the formulation of hot and cold coffee using

high quality coffee beans that have been roasted using its own unique

proprietary bean roasting process. As of June 2017, the Group has a

total chain of 234 café outlets, of which 197 café outlets are located in

Malaysia, 25 café outlets in Indonesia, eight café outlets in Singapore,

two café outlets in China, one café outlet each in Australia and Hong

Kong operating under the brand name of ’Oldtown White Coffee’.

While its beverages are sold in more than 8,000 retail outlets in

Malaysia, 850 retail outlets in Singapore and 2,800 retail outlets in

Hong Kong. Other export market includes the USA, China, Taiwan,

Indonesia, Thailand, Brunei, Canada, Philippines, the United Kingdom

and Australia.

Key investment thesis:

i) FMCG segment to drive growth through export;

ii) Synergistic value gain through vertical integration and;

iii) Strong fundamentals

Key risks:

i) Strengthening of the Ringgit would slow down export sales

growth;

ii) Stiff competition in the local F&B market might cause drag on

earnings;

iii) Continuous reliance on advertising and promotional expenses to

spur consumer spending

RETURN STATS

Price (15 June 2017) RM2.72

Target Price RM2.90

Expected Share Price Return +6.4%

Expected Dividend Yield +2.9%

Expected Total Return +9.3%

STOCK INFO

KLCI 1790.01

Bursa / Bloomberg 5201 / OTB MK

Board / Sector Main / Consumer

Syariah Compliant Yes

Issued shares (mil) 463.24

Par Value (RM) 1.00

Market cap. (RM’m) 1,260.01m

Price over NA 3.21

52-wk price Range RM1.68-RM3.46

Beta (against KLCI) 0.77

3-mth Avg Daily Vol 1.48m

3-mth Avg Daily Value RM4.17m

Major Shareholders (%)

Oldtown International 42.58

Mawer Investment 9.20

Franklin Resources 4.43

MIDF EQUITY BEAT Friday, 16 June 2017

2

KEY INVESTMENT THESIS

FMCG segment to drive growth through export

Oldtown exports its white coffee products to more than 13 countries worldwide which include countries in South East

Asian region as well as Hong Kong and China. Among its product offerings, instant white coffee and tea mix

command the largest concentration of approximately 92% (Refer Figure 1 and Figure 2). In its key overseas markets

i.e. Hong Kong and Singapore, the brand is widely recognised as the number two coffee mix manufacturer behind

Nestlé with market share of 31% and 18% respectively.

Figure 1: FMCG segment’s category portfolio Figure 2: FMCG segment’s category concentration

White coffee

& tea Mix

92%

Roasted

coffee

3%

Ready to

drink

5%

Source: Company Source: Company, MIDFR

Being the largest of the two business segment, the FMCG segment contributed 80% (RM63m) of operating profit for

FY17 while the remaining 20% (RM16m) is contributed by the F&B segment (Refer Figure 3). The former segment

experienced an improved performance especially in FY16 and FY17 due to the higher selling and distributors’

coverage as well as, the positive impact from the weak Ringgit against foreign currencies. The five-year operating

income CAGR is very strong at +23.9% and we expect that the FMCG segment will continue to drive the growth for

the group as the product acceptance in new markets increase. Meanwhile, the F&B segment recorded subdued

performance mainly due to the sluggish economy as well as intense competition domestically which resulted in lower

sales and higher operating costs.

Figure 3: Annual operating profit of FMCG and F&B (RM million)

Figure 4: Annual operating profit growth of FMCG and F&B

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

FY12 FY14 FY15 FY16 FY17

FMCG F&B

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

FY12 FY14 FY15 FY16 FY17

FMCG F&B

Source: Company, MIDFR Source: Company, MIDFR

Ready-to-drink

White coffee & tea mix Roasted coffee


3

The recent stellar growth of FMCG’s segment is mainly driven by export as it grew by +26%yoy in FY17. This

boosted the size of FMCG revenue contribution derived from overseas to 65% whilst revenue derived domestically

only accounts for 35%. Of the 65% of revenue from overseas market, the Greater China’s contribution is the largest

which amounted to 45% of FMCG’s revenue (Refer Figure 6) and this even surpassed the contribution from the

domestic market of 35%. The significant contribution from Greater China is mainly driven by the stellar growth of

+145%yoy for Chinese market. This improvement is very much attributed to the setting up of marketing and sales

team to handle distribution network in China to supply to key supermarket chains such as Walmart, Vanguard, and

RT Mart as well as ramping up the e-commerce distribution channel. In the e-commerce segment, Oldtown product is

well supported by over 100 China online retailers across the three key e-commerce platforms like T-mall, JD.com and

Taobao.com. We are positive on Oldtown’s strategy to ride on China’s online and offline sales platform as this will

significantly improve customer reach of its products.

Figure 5: Oldtown products selling in China e-commerce platforms

Figure 6: FMCG’s revenue breakdown by countries

Greater China

45%

Malaysia

35%

ASEAN (ex-

Malaysia)

14%

Others

6%

Source: Company Source: Company, MIDFR

Oldtown strategy of re-focusing on China is timely as the country’s economic recovery is gaining traction as the

growth in the first quarter of 2017 rose to 6.9%, its fastest pace in more than a year. In addition, the China

Manufacturing SA is leading the JP Morgan Global Manufacturing PMI for February signalling a pickup in

manufacturing activities (Refer Figure 8). As China’s economy recovers, we expect that the private consumption will

also pick up. In line with this, we observed that the retail and wholesale sector expanded at the fastest pace in the

first quarter since the end of 2014 with an annual growth of 7.4%, increased by + 1.6ppts year-on year. In the e-

commerce segment, Tmall reported revenue growth of +363%yoy (Refer Figure 7). Due to the economic recovery,

we opine that the Oldtown’s strategy to refocus on the China’s market recently is timely as it is better position to

benefit from the expected increase in China’s private consumption as its economic recovers. Hence, we expect that

FMCG’s revenue from China to grow at 20% in the near term in line with the management expectation.

Figure 7: Sales growth trend of China e-commerce platform, Tmall (FY17 vs FY16)

Figure 8: China Mfg vs JP Morgan Global Mfg PMI

Source: Company Source: MIDFR

50 = expansion threshold


4

Synergistic value gain through vertical integration

Oldtown is vertically integrated along its supply chain as it first started with the manufacturing of coffee beverage

before venturing into café outlets business. This model has strengthened its competitive position in comparison to its

close competitors that operates solely in either one business segment. This is despite the fact that its café outlet

business recorded a contraction since FY12 due to the intense competition locally with the likes of ‘kopitiam’

operators like Paparich and Hailam Kopitiam as well as international coffee chain such as Starbucks and Coffee Bean.

Nevertheless, the two business segment complement each other in terms of raw material procurement, support

services, marketing campaign, promotion, business strategies and advertisement. In addition, having café outlets

help the Oldtown brand to have a stronger presence especially in penetrating new market as it enables the group to

increase the profile and awareness of the brand among consumers.

Figure 9: Second outlet opening in China Figure 10: : First outlet in Hong Kong

Source: Company Source: Company

In line with the focus on China’s market, Oldtown plans to open 25 outlets within five years in the country in strategic

location in Beijing, Guangzhou and Shanghai in view of the country’s enormous potential and growing affluence

amongst the urban population. Currently, it only operates two outlets in Jiangsu provinces. Its third outlet in China is

targeted to open in 3QFY17 in Fujian. In addition, Oldtown launched its first outlet in Hong Kong at the Hong Kong

International Airport (HKIA) in October 16. We expect good performance from these outlets as the Oldtown brand is

very well established in both markets looking at the recent sales growth of the FMCG segment from the Greater

China region (Figure 6). We are positive on Oldtown’s strategy on going international amidst the current sluggish

domestic spending. As the local F&B segment is going through a period of consolidation, the total number of café

outlets has now been reduced to 234 in FY17 from 245 in FY16, we expect that the revenue contribution from

overseas market will increase gradually from the current 12% in FY17 (Refer figure 11). Nonetheless, we do not

expect the overall F&B segment will recover from its subdued performance in the near term as restructuring phases

is still at an infant stage.

Figure 11: F&B’s revenue breakdown by markets Figure 12: Number of outlets by country

88%

12%

Domestic

Export

Country Outlets

Malaysia 197

Indonesia 25

Singapore 8

China 2

Hong Kong 1

Australia 1

Total 234

Source: Company Source: Company


5

The strategy on launching more café outlets in China bodes well with the rising sales of Oldtown’s beverage products

in the country as it indicates strong products acceptance by the Chinese consumers. In addition, as the rising sales

are driven by e-commerce platforms, having an offsite presence i.e. a café outlet is vital for a number of reasons.

One of the reasons is it serves as a place for customer to experience the brand culture and experience the products

in person before purchasing it. This in turn will create brand experience as the café outlet’s atmosphere can be a key

differentiator for the brand as it is a great way to create a lasting impression and value proposition of the brand. This

concurs with the TimeTrade’s State of Retail 2017 Report which stated that 75% of consumers prefer to shop in

physical stores because they like to test products in person before buying them. Hence, operating in an integrated

business model put Oldtown in a competitive advantage in comparison with another local White Coffee player which

also export to China beverage but operate as pure beverage manufacturer.

Another benefit of the integrated business model is cost savings achieved from a lower operational expense. For

instance, as the group promotes its beverage products and café outlets under a single brand across the regions, this

generates savings in the form of lower advertising and marketing costs. In fact, the group managed to lower the

advertising and marketing costs by -19%yoy in the 9MFY17 before ramping up of promotional activities in 4QFY17

causes total selling and distribution expenses in FY17 to increase by +2.1ppts yoy to 19.7% over revenue. In

addition, cost savings are also realised in raw material procurement as economies of scale is achieved by having two

complementary business segments. For instance, approximately 40% of the raw material cost is attributable to coffee

beans and this commodity exhibited an uptrend in prices since the beginning of FY16. Nevertheless, the group has

managed to keep its raw material cost at the range between 27%-30% of revenue (Refer Figure 14). This is

significantly lesser than the 45% range recorded by its close local competitor, Power Root Berhad (not rated) which

main business is coffee beverage manufacturing. Currently, the prices of Arabica and Robusta coffee beans have

started to decline about 10% since the beginning of January 2017 (Refer Figure 13) which is expected to stabilise

margins going forward.

Figure 13: Normalised daily price trend of Arabica and Robusta coffee beans (Jan-Jun 2017)

Figure 14: Raw material costs as percentage of revenue (%)

Source: Bloomberg Source: Bloomberg

This integration has placed Oldtown in a stronger position to create more value, capture market share and generate

new growth for the group in the long run. This business model allows the group to control most aspects of the value-

added chain to product quality and service provision as well as to retain as much profit as possible within the group.

These factors help in being more cost effective to compete against other café outlet operator as well as other coffee

beverage manufacturers.


6

Strong fundamentals

Oldtown reported a healthy CAGR in revenue and net profit of +8.3% and +8.3% respectively since its listing in

2011. This is achieved despite the contraction in operating profit of the F&B segment since 2012 (Figure 4).

Nevertheless, performance of F&B segment is expected to improve as the segment is undergoing consolidation

stages with the closure of unprofitable outlets. In addition to the overseas expansion of the segment as well as the

already strong growth in the FMCG segment driven by the export market, we expect a strong top line growth for the

group moving forward. Net profit margins for the group hovered at a five year average of 13%. Moving forward, we

expect the margin to normalise at a region of 14% due to growth of FMCG segment which is a relatively higher

operating margin business of 20% historically in comparison to the F&B segment of 14.5%.

In addition, the group has had a dividend payout ratio of approximately 54% or 6sen per share with the exception of

FY16 where the ratio is of 78% due to a special dividend declared of 3sen per share. Based on our target price, the

expected dividend yield for FY18-FY19 is still reasonable yielding at an average of approximately 3%. The group also

has a very healthy cash reserve with the latest available quarter i.e. 4QFY17 reported a cash and cash equivalent

balance of RM169.56m. The progressive growth in the group’s earnings has enabled it to maintain a net cash position

since its listing in 2011. Also, the current total borrowing of RM10.61m is relatively low whilst the CAPEX requirement

going forward is projected to double FY17 CAPEX of RM22m. Hence, we opine that the payout ratio at the region of

54% is manageable.

Figure 15: Annual net profit and growth Figure 16: Dividend per share and payout ratio

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

FY13* FY14 FY15 FY16 FY17

Net profit

Growth

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0


Source: Bloomberg Source: Bloomberg

Figure 17: Net cash

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0


Source: Bloomberg

Sen RM mil


7

Key Risks

The strengthening of the Ringgit would slow down export sales growth. As Oldtown is relying on the export sales of

FMCG segment to deliver growth, further strengthening of the Ringgit would have a downward pressure on its

bottom line. Recall that contribution derived from overseas from the FMCG segment accounted for 65% total FMCG

revenue. While the foreign currencies exposure arises from these overseas trades are mainly derived from the SGD,

HKD and USD. Since April 17, all three currencies have shown consistent strengthening against the Ringgit. For

instance, the MYR/USD improved to RM4.26 on 14 June 17 from RM4.42 on 30 March 17 (-3.62%) and Ringgit is

expected to strengthen further to RM4.20 MYR/USD by year end.

The stiff competition in the local F&B market might further dragged down earnings. Oldtown F&B’s segment

constitute a significant 88% of F&B segment total revenue. As local F&B market is undergoing a high operational cost

environment as well as stiff competition. Oldtown faces competition from the players in ‘kopitiam’ segment

(Papparich, Hailam Kopitiam etc), international coffee chain (Starbucks, Coffee Bean etc) as well as artisan coffee

outlets. Nevertheless, it should not be a concern as no one brand can cause direct effect to other since the market

volume is very large. Hence, in order to increase market share, Oldtown would have to focus on advertising, pricing

and quality of their products. Due to this, advertising and promotional efforts have intensified in 4QFY17 bringing the

total selling expenses to increase +31%yoy. Continuous reliance on these will pressure profit margin.

VALUATION

We are recommending a Neutral stance on Oldtown with a target price of RM2.90 per share. Our valuation is

premised on FY18EPS of 14.5sen pegged to FY18 forward PE of 20x. Our target PER is based on market

capitalisation weighted FY18 forward PE of Oldtown’s peers in the F&B and FMCG segment.

Figure 18: Peer Comparison

Currency Last price

Mrkt cap

P/E P/BV ROE Div Yield

Stocks

MYR CY17 CY18 CY17 CY18 CY17 CY18 CY17 CY18

F&B

Berjaya Food Bhd MYR 1.69 632.38 28.17 21.39 1.59 1.54 5.48 7.20 1.95 2.66

Old Chang Kee SGD 0.84 314.02 20.00 19.09 3.11 3.00 15.20 16.10 3.57 3.57

Breadtalk SGD 1.49 1291.01 20.69 18.86 2.88 2.63 15.02 14.50 2.68 2.21

Market cap weighted

22.71 19.61 2.55 2.37 12.35 12.66 2.60 2.53

FMCG

F&N MYR 24.68 9046.24 22.40 20.30 4.07 3.75 18.40 18.67 2.67 2.94

Cocoaland MYR 2.72 622.34 14.32 13.95 2.31 2.13 16.50 16.00 3.68 3.86

Super SGD 1.305 4478.73 28.37 26.63 2.51 2.44 9.04 9.55 1.99 2.22

Market cap weighted

23.22 21.66 3.00 2.82 13.90 14.11 2.59 2.83


8

SUMMARY OF FINANCIAL STATEMENTS Income statement 2015 2016 2017 2018F 2019F Balance sheet 2015 2016 2017 2018F 2019F

Revenue 397.7 393.4 425.2 471.2 508.4 Assets

EBITDA 83.0 85.7 88.6 106.0 114.4 PPE 108.7 109.7 117.7 123.0 124.7

Depreciation/Amortisation (18.9) (16.9) (17.1) (20.4) (21.8) Intangible assets 20.2 18.8 18.8 18.8 18.8

EBIT 64.1 68.8 71.5 85.6 92.6 Others 49.6 45.7 42.1 38.6 35.1

Other income 4.6 3.3 9.4 1.9 2.1 Total NCA 178.5 174.1 178.5 180.4 178.6

Net interest expense (1.1) (0.9) (0.7) (0.5) (0.3) 0.0 0.0 (7.7) 0.0 0.0

Exceptional items 3.5 3.0 0.0 0.0 0.0 Receivables 61.7 63.0 63.3 73.3 79.6

PBT 71.2 74.2 80.2 87.0 94.4 Inventories 30.1 25.5 26.7 30.9 34.4

PAT 49.1 52.3 60.0 67.0 72.7 Others 31.8 17.5 15.7 17.5 17.5

EPS (basic) - adjusted 10.5 11.6 13.3 14.5 15.7 Cash & cash equiv. 135.0 169.4 170.9 172.1 201.6

EPS growth (%) (3.0) 10.1 14.8 8.8 8.4 Total CA 258.6 275.5 276.5 293.9 333.2

Dividend/share (sen) 6.0 9.0 6.0 8.0 8.6 0.0 0.0 (27.4) 0.0 0.0

Payout ratio (%) 57.0 77.7 45.1 55.0 55.0 Total assets 437.1 449.6 455.0 474.3 511.7

Dividend yield (%) 2.2 3.3 2.2 2.9 3.2

0.0 0.0 (19.7) 0.0 0.0

Cash flow 2015 2016 2017 2018F 2019F Equity

Operating cash flow Issued capital 453.6 463.2 472.7 463.2 463.2

PBT 49.1 52.3 60.0 67.0 72.7 Share premium (214.0) (207.7) (213.5) (207.7) (207.7)

Depreciation & Amortisation 18.9 16.9 17.1 20.4 21.8 Treasury shares, at cost (21.1) (21.5) (21.6) (21.5) (21.5)

Others 19.2 22.6 22.3 18.8 20.1 S/holder's funds 218.5 234.0 237.6 234.0 234.0

OP before ∆ in WC 87.2 91.7 99.5 106.2 114.6 NCI 3.8 0.0 (0.8) 0.0 1.0

∆ in working capital (9.4) (14.4) (1.0) (0.4) (4.4) Total equity 336.9 362.1 371.3 383.3 419.0

Cash from operations 77.8 77.3 98.5 105.8 110.2 0.0 0.0 0.0 0.0 0.0

Tax paid (12.5) (15.6) (21.9) (20.0) (21.7) Liabilities

Net CF to Operations 65.2 61.7 76.6 85.7 88.5 Borrowings 15.7 12.1 8.2 6.9 3.9

0.0 0.0 (3.1) 0.0 0.0 Others 8.1 7.1 6.8 5.9 6.0

Investing cash flow Total NCL 23.8 19.3 15.0 12.8 9.9

Acquisition of PPE (11.6) (10.6) (22.3) (30.0) (20.0)

Others (20.4) 17.0 1.8 1.7 1.9 Payables 64.1 56.3 58.0 68.3 73.7

Net CF to Investments (32.0) 6.5 (20.6) (28.3) (18.1) Others 12.4 12.0 10.7 9.9 9.0

Total CL 76.5 68.2 68.7 78.2 82.7

Financing cash flow Total liabilities 100.3 87.5 83.7 91.0 92.6

Dividends (27.0) (26.8) (54.2) (52.3) (36.9)

Net rpmt of term loans (4.8) (3.7) (5.3) (3.7) (3.7) Total equity and liab. 437.1 449.6 455.0 474.3 511.7

Others (24.7) (2.3) (0.8) (0.5) (0.3) - - - (0.0) 0.1

Net CF to Financing (56.4) (32.8) (60.3) (56.5) (40.8) Ratios 2015 2016 2017 2018F 2019F

0.0 0.0 (14.2) 0.0 0.0 Profitability ratios (%)

Exchange difference 1.9 (1.8) 6.0 0.0 0.0 ROE 22.5 22.3 25.3 28.6 31.0

Net increase/(decrease) (21.3) 33.6 1.8 0.9 29.5 ROA 0.1 0.1 0.1 0.1 0.1

Cash b/f 155.5 134.2 167.8 169.6 170.5 Liquidity ratios (x)

Ending cash c/f* 134.2 167.8 169.6 170.5 200.0 Current ratio 3.4 4.0 4.0 3.8 4.0

(0.78) (1.61) - - - Quick ratio 3.0 3.7 3.6 3.4 3.6

*Excluding fixed deposit placed under lien Net gearing 0.3 0.4 0.5 0.4 0.5

Profit margin (%)

PBT margin 17.9 18.9 18.9 18.5 18.6

Net profit margin 12.3 13.3 14.1 14.2 14.3

Source: Company, MIDFR


9

DAILY PRICE CHART

Nabil Zainoodin, CA

[email protected] 03-2772 1663


10

APPENDICES

Company Background OldTown Berhad is a Malaysia-based investment holding company, which is involved in the

manufacturing of beverages and the management of café chains, not only in Malaysia but also in neighbouring

countries, Singapore, Indonesia and Australia. Carrying the charm of a traditional Ipoh coffee shop since 1999, the

founders, Goh Ching Mun and Tan Say Yap have decided to serve a variety of Malaysian delicacies from white coffee

to toasts, and noodles to the society. As of June 2017, the Group has a total chain of 234 café outlets, of which 198

café outlets are located in Malaysia, 25 café outlets in Indonesia, 8 café outlets in Singapore, one café outlet each in

Australia, China and Hong Kong operating under the brand name of ’Oldtown White Coffee’. In 2011, the company

was listed under the main market of Bursa Malaysia and they also announced their incorporation of Oldtown APP Sdn

Bhd in the same year. The company operates in three business segments which include: i) Operation of Café Chain,

ii) Manufacturing of Beverages iii) Marketing and Sales of Beverages. Up to date, the company offers its products to

more than 13 countries worldwide which include both local and overseas markets.

Figure 1: Oldtown Berhad Managing Director (Siew Heng Lee)

Key Management Mr. Siew Heng Lee serves as the Managing Director at Oldtown Berhad and has been holding the

director’s post since November 2007. He brought with him more than 24 years of invaluable industry experience that

he has been accumulating in the manufacturing and retailing industry and also in the coffee beverage business line.

Mr. Lee has been a driving force in the expansion of the group’s beverage manufacturing and their café chain

operation businesses. Not only is he involved in the expansion of the company’s business activities, he has also been

contributory in the growth and expansion of the Oldtown Group of companies. Before re-designated as the managing

director of Oldtown Group in 2009, Mr. Lee was a managing director at one of Oldtown Group’s company, known as

White Café Marketing in 2001. He is in command for several private companies and is currently the chairman of the

holding company of Oldtown Berhad, Oldtown International Berhad.

Integrated Business Model The Company carries out an integrated business model which is anchored by two of

their main businesses, the Food and Beverage (F&B) industry and the Fast Moving Consumer Goods (FMCG). This

operation has been carried out over the years and is seen to be an overwhelming success. The model comprises of

the café chain outlets operations and the manufacturing of beverages complements one another in terms of raw

materials acquirement, support services, marketing and promoting campaign and more.

Main Businesses As mentioned before, Oldtown is involve in the management of many café chain operation,

manufacturing of beverages as well as marketing and sales of beverages. Oldtown is also known for implying FMCG

which is to produce and sell as quickly as possible but at a relatively low cost, to reach a bigger market target. Some

of the business activities of Oldtown Berhad are as the table below:


11

Figure 2: Business Activities of Oldtown Berhad

a) Operation of Café Chain

At Oldtown, the main business operators are the chain of café outlets. The segment owns and usually

manages the café outlets. These cafés are built upon on the traditional concept of Ipoh coffee shop setting

and ambience under the well-known name of “Oldtown White Coffee”. They specialize in formulating their

own hot and cold coffee mixture using high quality raw coffee beans that are sourced from planters not only

Malaysia but also around the South-East Asian region. The Oldtown White Coffee are made from a blend of

three different types of coffee beans which then would undergo the proprietary bean roasting procedure to

ensure customers satisfaction. Oldtown is also involved in the F&B business, not only do they serve

beverages at the café outlets but they also offer food such as their famous Kaya and Butter Toast, Oldtown

Ipoh Chicken Hor Fun and more.

As mentioned before, up to 2016, the company has café outlets at more than 220 destination and almost

half of their total café outlets are fully owned or partially owned and operated by the management. The

remaining are either franchised or licensed outlets to others.

Figure 3: Network of Oldtown Berhad Café Outlets

Country Number of Café Outlets

2014 2015 2016 2017

Malaysia 208 214 210 197

Singapore 10 10 10 8

Indonesia 17 20 23 25

China 3 1 1 2

Australia - - - 1

Hong Kong - - - 1

Total 238 245 244 234


12

Figure 4: Types of Coffee Beans used by Oldtown

Source: Company

b) Manufacturing of Coffee and other Beverages

One of Oldtown’s main business divisions that imply the FMCG concept also includes the manufacturing of

coffee and tea beverages, such as instant coffee mix, instant milk tea mix, instant chocolate mix and roasted

coffee powder. The company’s famous 3-in-1 white coffee mix is produced at a much larger state-of-art

facility in Tasek Industrial Estate also known as the White Café Plant. With high advancement in machinery

and the help of more than 200 workers, this plant is able to produce 35,000 kg of finished products on daily

basis. The production plant also has a laboratory where food technicians can conduct R&D to ensure the

quality and safety of the products is maintained. Oldtown diverse its production by coming out with different

flavors of coffee such as Classic, Hazelnut, Cane Sugar and more. With the company’s decision of

manufacturing canned ready-to-drink coffee under the same brand, “Oldtown White Coffee”, consumers are

now able to get these beverages more conveniently as they are widely distributed in supermarket,

hypermarkets, convenience stores and also petrol kiosks.


13

Figure 5: Oldtown Products from the FMCG Business

c) Marketing and Sales of Coffee and Other Beverages

As mentioned before, Oldtown does not only run its business in Malaysia but they have also built a strong

international distribution network for their products all around the globe. As of March 2016, Oldtown

beverages are sold in more than 8,000 retail stores nationwide. As these beverages are shipped and sold to a

number of countries, it is very important that the packing is adheres to the different countries guidelines and

specifications.

Figure 6: FMCG Business Network


14

MIDF RESEARCH is part of MIDF Amanah Investment Bank Berhad (23878 - X).

(Bank Pelaburan)

(A Participating Organisation of Bursa Malaysia Securities Berhad)

DISCLOSURES AND DISCLAIMER

This report has been prepared by MIDF AMANAH INVESTMENT BANK BERHAD (23878-X). It is for

distribution only under such circumstances as may be permitted by applicable law.

Readers should be fully aware that this report is for information purposes only. The opinions contained in

this report are based on information obtained or derived from sources that we believe are reliable. MIDF

AMANAH INVESTMENT BANK BERHAD makes no representation or warranty, expressed or implied, as to

the accuracy, completeness or reliability of the information contained therein and it should not be relied

upon as such.

This report is not, and should not be construed as, an offer to buy or sell any securities or other financial

instruments. The analysis contained herein is based on numerous assumptions. Different assumptions

could result in materially different results. All opinions and estimates are subject to change without

notice. The research analysts will initiate, update and cease coverage solely at the discretion of MIDF

AMANAH INVESTMENT BANK BERHAD.

The directors, employees and representatives of MIDF AMANAH INVESTMENT BANK BERHAD may have

interest in any of the securities mentioned and may benefit from the information herein. Members of the

MIDF Group and their affiliates may provide services to any company and affiliates of such companies

whose securities are mentioned herein This document may not be reproduced, distributed or published

in any form or for any purpose.

MIDF AMANAH INVESTMENT BANK : GUIDE TO RECOMMENDATIONS

STOCK RECOMMENDATIONS

BUY Total return is expected to be >15% over the next 12 months.

TRADING BUY Stock price is expected to rise by >15% within 3-months after a Trading Buy rating has been assigned due to positive newsflow.

NEUTRAL Total return is expected to be between -15% and +15% over the next 12 months.

SELL Total return is expected to be <15% over the next 12 months.

TRADING SELL Stock price is expected to fall by >15% within 3-months after a Trading Sell rating has been assigned due to negative newsflow.

SECTOR RECOMMENDATIONS

POSITIVE The sector is expected to outperform the overall market over the next 12 months.

NEUTRAL The sector is to perform in line with the overall market over the next 12 months.

NEGATIVE The sector is expected to underperform the overall market over the next 12 months.

oldtown berhad initiate with - midf equity beat friday, 16 june 2017 4 synergistic value gain...

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