EARNINGS GROWTH: Photo shows diners at one of Oldtown’s retail cafes. The group has leveraged another node of earnings growth in the form of a 70 per cent stake in Hong Kong based ACL.
KUCHING: Oldtown Bhd (Oldtown), which is seeing rapid growth in its fast moving consumer goods (FMCG) division, has leveraged another node of earnings growth in the form of a 70 per cent stake in Hong Kong based Advanced City Ltd (ACL).
The retail cafe and FMCG group recently entered to a purchase agreement to acquire 1.4 million shares of the 16-year old ACL – a products trader and distributor in Hong Kong, Macau and Guangdong – for an aggregate value of HK$67 million or RM26.4 million.
In a research note yesterday, the research arm of Kenanga Investment Bank Bhd (Kenanga Research) expressed its positive view on the news as “the acquisition will enable the group to take control of the operation and maximise the sales potential through its existing 2,400 distribution points in the region.”
“We also reckon that the group has no issues with the payment as the acquisition will be funded by the RM64 million proceeds raised from its private placement exercise in December 2012,” Kenanga Research stated.
The research team added that based on the results for financial year 2012 (FY12), ACL’s HK$14.2 million (approximately RM5.6 million) in net profit would have contributed RM3.9 million to Oldtown, which was about 8.8 per cent of its 2012 estimated earnings.
“Based on our back-of-the envelope calculation, we reckon that the 2012 profit before tax margin for the FMCG segment will be improved by three percentage points.
“As such, the acquisition, which is expected to be completed by the third quarter of 2013, should enhance the group’s profit margin from FY14 onwards,” the research arm stated.
Meanwhile, RHB Research Institute Sdn Bhd (RHB Research) opined that upon completion of the deal, Oldtown would, “be able to take control of the company’s current distribution network in China to maximise its sales potential.”
“We believe the group will be able to strengthen its marketing and distribution operations by participating directly in ACL’s pricing, marketing and branding strategy post-acquisition.
“This deal is expected to contribute positively to group earnings. If the acquisition had taken place on January 1, 2012, the profit contribution from ACL would have come to approximately RM4 million,” RHB Research said.
The research house added that the additional earnings contribution from ACL would bump up its forecast FY14 numbers by 3.7 per cent.
Accordingly, it boosted its fair value of the stock up by 22 sen to RM2.82 per share as it rolled over its valuation to 15 times FY14 earnings per share (EPS).
Kenanga Research maintained its FY13 estimated earnings at RM45.4 million but revised FY14 earnings estimates slightly higher from RM50.3 million to RM53.8 million.
The full impact from the acquisition would stream in from FY15 onwards, it said as it raised the stock’s target price to RM2.53 per share (from RM2.38 per share previously), based on an unchanged price earnings ratio multiple of 17.1 time over FY14 EPS.