JULY 6 — OldTown Bhd is a home-grown proprietor involved in the white coffee business that also operates with an extensive chain of cafes in Malaysia. The group has a total of 182 café outlets in Malaysia, Singapore and Indonesia.

It also distributes its coffee and other beverage products particularly in Malaysia, Singapore and Hong Kong although its products are also marketed worldwide.

It plans to grow its chain of outlets by 15 per cent this year and ramp up production capacity of its beverage products by 500 per cent by 2013. While a reputable brand name, OldTown will continue to face stiff competition and rising costs.

We value OldTown at RM1.34 pegged to 12.5x FY11 EPS.

White coffee legacy

Inspired to provide quality white coffee to Malaysians, the group’s founders Go Ching Mun and Tan Say Yap created their own instant white coffee formula in 1999.

The duo established their manufacturing operations in the same year under the “Oldtown” brand name and in 2005, expanded vertically into the food services segment under the “Old Town White Coffee” brand name. Today, the group has 171 café outlets in Malaysia, 9 cafés in Singapore and 2 in Indonesia.

OldTown started manufacturing its own blend of 3-in-1 instant white coffee in 1999 and later expanded its product line to include variations of its instant coffee mix. Within a decade, its products were distributed nationwide and successfully commercialized in more than 10 overseas markets.

OldTown expanded downstream into the food service segment by establishing its first café outlet in 2005, and in the span of five years, extended this to a network of 182 outlets.

Apart from a strong brand name, other factors that fuelled this fast growing business are the adoption of a franchising strategy and the fact that the group is operated by experienced management. With a large number of outlets and wide distribution network, OldTown enjoys significant advantage in ensuring that its products are easily accessible to as many end-consumers as possible.

Expanding production capacity

OldTown plans to open 27 more outlets in FY11, which will bring the total number of outlets to 209. The group also plans to relocate its food processing operations and manufacturing plant to a central location in Ipoh.

Construction of the new plant started in 2Q2011 for completion by 2013. The new plant, once completed, is expected to ramp up the group”s production capacity by 500 per cent.

Fair value at RM1.34

We remain neutral on the prospects of OldTown’s F&B segment, which contributes the bulk of its revenue due to stiff competition and rising costs. We value OldTown at 12.5x FY11 EPS, which translates into a fair value of RM1.34, or a 7.2 per cent upside from the listing price of RM1.25.

The group has recommended a dividend payout of no less than 50 per cent for FY11/12, which translates into a divided yield of 4.3 per cent-4.8 per cent.

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