Old Town Berhad - INITIAL PUBLIC OFFERING

Modern twist to old heritage.
Old Town is the manufacturer of ‘OLDTOWN’ instant beverages and the operator of the ‘OLDTOWN WHITE COFFEE’ kopitiam-based café outlet chain. Since the inception of its first shop in 2005, it has expanded to 182 café outlets in Malaysia, Singapore and Indonesia as at 22 June 2011. Of which, half are either fully-owned or partially-owned outlets while the other half are franchised shops. In terms of profit mix, the café chain operation contributes more (65% of FY10 net profit) while the beverage manufacturing segment accounts for the balance.

More outlets opening will drive growth.
Within a short span of 6 years, Old Town has grown its ‘OLDTOWN WHITE COFFEE’ café outlets from one store in Ipoh to 182 outlets spanning across Malaysia, Singapore and
Indonesia. The number of outlets is set to continue growing, with 38 outlets slated to open in FY11 (of which 14 are already in operation) and an additional 31 shops in FY12. Each fully-owned outlet is projected to generate approximately c.RM1m per year in revenue, though the initial contributions will be lower. We expect the growing network of café outlets to lift total revenue to RM300.6m (+18% y-o-y) in FY11 and RM349.5m (+16% y-o-y) in FY12, translating to a 2-year net profit CAGR of 14% to RM41.4m.

High dividend payout expectations.
Old Town has set a minimum dividend payout policy of 50% of its gross earnings for FY11 and
FY12. Based on our forecasts, net DPS works out to be 4.1 sen this year and 4.7 sen next year, which translates to dividend yields of 3.3% and 3.8%, respectively. We believe Old Town is in a position to sustain the high dividend payout expectations given its healthy balance sheet, with net cash balance projected to rise from RM14.4m (or 4.4 sen per share) post listing to RM34.8m (or 10.6 sen per share) by end-FY12.

Subscribe for a 20% upside potential.
We arrive at our RM1.50 fair value based on a P/E multiple of 12x on FY12F EPS of 12.5 sen.
Compared to its two locally listed peers, our target P/E valuation represents a discount to KFC (P/E of 16x) and a premium to Berjaya Food (P/E of 9x). This partly reflects Old Town’s market cap size of RM495m (based on our fair value of RM1.50) vis-à-vis KFC’s RM3.1bn and Berjaya Food’s RM119m.

OFFER PRICE: RM1.25 FAIR VALUE: RM1.50
by HwangDBS