Malaysian Consumer Sector

Transcription

1 Industry Focus Malaysian Consumer Sector DBS Group Research. Equity 22 Mar 2017 Refer to important disclosures at the end of this report Subdued consumer recovery, but expected Recovery in consumer sentiment remains fragile, but priced in 4Q16 earnings above, but due to low expectations; outlook remains cloudy OldTown remains our top pick for the sector Leading indicators point towards subdued recovery. Despite q-o-q pick up in private consumption growth in fourth quarter 2016, we remain cautious on the overall consumer sector given that leading indicators such as MIER Consumer Sentiment Index (CSI), job vacancies data and household loan approval rate continue to point towards subdued recovery. Earnings outlook remains sluggish. 4Q16 corporate results were above expectations partly due to already low market expectations. We maintain our cautious stance on the sector, as earnings prospects remain weak due to (1) continued slow recovery in consumer spending, (2) weakening ringgit that will inflate the cost of imported materials, (3) higher minimum wage effective from July 2016 to add onto cost pressures, and (4) an increasingly competitive operating environment and weak consumer market may restrict companies ability to pass on rising costs. Notable changes in recent stock recommendations. We recently downgraded BAT to Fully Valued and upgraded our call on MSM Malaysia Holdings to HOLD. We are putting our recommendation and TP for Padini under review, pending the upcoming management meeting. On the other hand, we maintain our BUY recommendation for Oldtown with higher TP of RM3.05. Lacking catalysts. While potential election goodies could help to temporarily create feel good sentiment, we do not expect it to be a significant re-rating catalyst for the sector. With no significant catalysts on the horizon, bottom up stock picking remains our strategy for investors to generate alpha returns. OldTown remains our top pick for the sector in view of its (1) resilient business model, (2) established brand name, (3) strong balance sheet, (4) regional exposure to mitigate (potential) domestic earnings risks, and (5) attractive valuation. KLCI : 1, Analyst King Yoong CHEAH cheahky@alliancedbs.com Nur Inani Rozidin inanirozidin@alliancedbs.com Abdul Azim Bin MUHTHAR azimm@alliancedbs.com STOCKS Source: AllianceDBS, Bloomberg Finance L.P. Closing price as of 21 Mar 2017 British American Tobacco : Manufacturing and distribution of tobacco products OldTown Berhad : Café chain operator & FMCG manufacturer Padini Holdings : Apparel and accessories retailer with overwhelming domestic presence as well as exposure in high end, mid-end and value clothing segments for all age groups. Sasbadi Holdings : Educational book publisher MSM Malaysia Holdings : Largest refined sugar manufacturer in Malaysia QL Resources : Agro-food producer involved in integrated livestock farming, marine products manufacturing and palm oil activities Petronas Dagangan : PETRONAS' retail arm which involves in the marketing and distribution of petroleum products i.e. mogas, diesel, LPG, aviation fuel, fuel oil, kerosene oil, lubricant and asphalt in Malaysia. MIER Consumer Sentiment Index and private consumption growth sa % q-o-q Price RM Mkt Cap Target Price Performance (%) US$m RM 3 mth 12 mth Rating British American Tobacco , (13.7) FULLY VALUED OldTown Berhad BUY Padini Holdings BUY Sasbadi Holdings BUY MSM Malaysia (8.2) (3.9) HOLD QL Resources , HOLD Petronas Dagangan , (2.5) HOLD Private consumption growth (lhs) Consumer sentiments index (rhs) 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q Source: Department of Statistics, MIER ed-ck / sa- BC, PY

2 Industry Focus Malaysian Consumer Table of Contents Sentiment still subdued 3 Potential election goodies 4 4QCY16 results review 4 Margin compression 5 M&A opportunities 6 Recommendation 6 Company Guides British American Tobacco 8 MSM Malaysia 15 Oldtown 22 Petronas Dagangan 29 QL Resources 35 Sasbadi 43 Page 2

3 Industry Focus Malaysian Consumer Sentiment still subdued Recovery remains downbeat. With the adverse impact of GST implementation fading, we have observed that recovery in consumer spending remains slow, uneven and fragile. We believe that the slow pick-up in consumer spending has been dragged by (1) higher cost of living contributed partly by removal of subsidies by the government, (2) slowing economic growth momentum, (3) concerns over job prospects, (4) ringgit volatility, and (5) high household debt. Table 1 : Elevated unemployment u rate % Jan-13 Apr-13 Jul-13 Unemployed persons (rhs) Oct-13 Jan-14 Apr-14 Jul-14 Source: Department of Statistics Table 2 : Household debt to GDP (%) stayed high % to GDP Source: Department of Statistics Table 3 : Recent policy developments that could raise cost of living Effective date Items Source: Various, AllianceDBS Oct-14 Jan-15 Apr-15 Unemployment rate (lhs) Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 ' Quantum of a djustme nt Jul-16 % cha nge 29-Jun-15 Cigarettes - excise duty hike +RM0.30/pack of Oct-15 Selected toll charges (18 intracity highways) - Avg 40 4-Nov-15 Cigarettes - excise duty hike +RM3.20/pack of Dec-15 KTM railway charges +4 sen/km Dec-15 LRT and Monorail charges - Avg 10 1-Mar-16 Removal of flour subsidy +RM8.25/pack of 25kg Mar-16 Alcohol Varies depending on alcohol content and litre charge Between -10 & Jul-16 Minimum wage hike +RM100 to RM1,000/mth for Peninsula Jul-16 Natural gas tariffs revision for non-power sector +RM1.52/MMBtu Nov-16 Retail pump price adjustment +15 sen/litre Nov-16 Cooking oil (various bottled packaging, except 1kg polybag) Reportedly between RM1.40/kg - RM1.82/kg per kg 1-Jan-17 Retail pump price adjustment +15sen/litre to 20sen/litre Between 6.7 & Feb-17 Retail pump price adjustment +10sen/litre to 20sen/litre Between 4.9 & Mar-17 Sugar price ceiling (wholesale & retail) raised +11sen/kg 4 per kg Private consumption growth picked up q-o-q. q Private consumption (55% of GDP) remained expansionary, growing by 2.2% in q-o-q terms in 4Q16, up from 0.2% sequential expansion in 3Q16. Nonetheless, we remain cautious as the q-o-q expansion could be driven by (1) heavy sales promotions and discounting activities towards the end of the year, (2) shopping for Chinese New Year which fell in Jan 2017, and, (3) the sharp weakening of Ringgit since November 2016 that may have encouraged local travelling among Malaysians, which supported end-of year sales. but leading indicators point towards subdued recovery. In fact, our cautious stance is supported by consumer leading indicators such as MIER Consumer Sentiment Index (CSI), job vacancies data and household loan approval rate. CSI statistics released by the Malaysian Institute of Economic Research (MIER) dipped q-o-q to 69.8 points in 4Q16 (3Q16: 73.6), pointing towards sluggish recovery in consumer spending. Besides that, data on recent job vacancies and household loan approval rates remain below the historical average, which could continue to drag consumption. In a recent report, Retail Group Malaysia (RGM) has also slashed its annual retail sales growth forecasts for 2017 from the initial 5% to 3.9%, citing low consumer confidence, dampened by weak economic environment and concerns of job prospects. Table 4 : Expansionary private consumption amid weak sentiment sa % q-o-q Source: Department of Statistics, MIER Private consumption growth (lhs) Consumer sentiments index (rhs) 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q Page 3

4 Industry Focus Malaysian Consumer Table 5 : Job vacancies remain below trend Reported job vacancies 800, , , , , , , ,000 Source: Department of Statistics, MIER Table 6 : Household loan approval rate remain below average Source: BNM - 1Q10 Household loan approval rate (%) Q10 3Q10 3Q10 1Q11 1Q11 3Q11 1Q12 3Q avg 3Q11 1Q12 3Q12 1Q13 1Q avg Excise duty hike unlikely for tobacco products, but sugar price has moved up. A couple of months have passed since Budget 2017 and there is no indication from authorities that there could be post-budget excise duty hike for tobacco products. We now believe that tobacco companies are off the radar for a potential excise duty hike until Budget 2018, to be tabled in fourth quarter Q13 Nevertheless, we recently downgraded British American Tobacco (BAT) to Fully Valued with RM41.70 TP in view of (1) sluggish topline recovery due to challenging industry prospects, in particular the persistently high proportion (>50%) of illicit trades, (2) profit margins being under pressure in 2017 as the group is starting to source tobacco products for the domestic market from other British American Tobacco Group s factories in the region, and (3) de-rating of PE as it is a pure trading company going forward. 3Q13 1Q14 1Q14 3Q14 3Q14 1Q15 1Q15 3Q15 3Q15 1Q16 1Q16 3Q16 3Q16 On the other hand, we upgraded our call on MSM Malaysia Holdings to HOLD and raised our TP to RM4.70 after we raised our earnings forecasts to reflect the higher average selling price of sugar announced by the authorities effective in March. Potential election goodies Sentiment is so low that goodies will help. We maintain that one theme to watch this year will be potential election goodies. The government is poised to hold a general election (GE) latest by May 2018 and the market is anticipating that the election will take place this year. As such, we will not be surprised if the government announces additional stimulus measures this year to create feel-good factors prior to the election. Anticipated potential election goodies include (1) higher civil servant bonus and/or even pay rises, (2) imposition of cap on petrol price increase, (3) increased allocation of landbank for PRIMA housing scheme, and (4) more high impact infrastructure projects. While potential election goodies could temporarily create feel good sentiment, we do not expect this to be a significant re-rating catalyst for the sector. 4QCY16 results review An appetising quarter. Quarterly earnings were above expectations mainly contributed by (1) already low market expectations, and, (2) strong earnings contributions by Petronas Dagangan, OldTown, and Padini. Petronas Dagangan benefited from the recovery of crude oil price in 4Q16. On the other hand, OldTown benefited from strong export sales and weak ringgit, while Padini continued to ride on downtrading, new store expansions and resilient margins. As illustrated in table 8, total profit for the 4QCY16 for consumer stocks under our coverage improved by 25% y-o-y mainly boosted by strong earnings contributions from Petronas Dagangan, OldTown, and Padini due to factors outlined above. On a q-o-q basis, earnings growth for 4Q was relatively flattish. Page 4

5 Industry Focus Malaysian Consumer Table 7 : 4QCY16 results summary table Company Source: AllianceDBS Table 8 : 4QCY16 : Earnings growth trends Source: AllianceDBS Sluggish earnings e outlook. Despite stronger than expected 4Q16 results, we maintain our cautious stance on the sector, as earnings prospects are expected to remain weak due to (1) continued slow recovery in consumer spending, (2) weakening ringgit that will inflate the cost of imported materials, (3) higher minimum wage effective from July 2016 to add on to cost pressures, and (4) an increasingly competitive operating environment and weak consumer market may restrict companies ability to pass on the rising cost. Margin compression F inancial quarters EPS Change v s DBS estimates v s consensus estimates BAT 4QFY16 Inline Inline MSM Malaysia 4QFY16 Below Below Oldtown 3QFY17 Above Above Padini 2QFY17 Inline Above Petronas Dagangan 4QFY16 Above Above Sasbadi Holdings 1QFY17 Inline Inline QL Resources 3QFY17 Inline Inline Com pany Financial quarters rs Y-o-Y change Q-o-Q change BAT 4QFY % -22.4% MSM Malays ia 4QFY % -38.2% Oldtown 3QFY % 85.0% Padini 2QFY % 91.0% Petronas Dagangan 4QFY % 5.1% Sasbadi Holdings 1QFY17-3.1% 10.9% QL Resources 3QFY % 5.2% T otal 25.3% -0.1% Key drag on earnings. In fact, we expect margin compression to be the key earnings downside risk going forward for consumer stocks under our coverage. The potential victims include Padini and MSM, with the former sourcing about 80-90% of its products from China. As such, the ringgit s persistent weakness against RMB could continue to increase Padini s inventory cost and put downward pressure on its margins in the coming quarters. We are also concerned that the recent hike in MSM s selling price may not be sufficient to cover the higher production cost should there be significant increase in USD- denominated raw sugar costs. OldTown and BAT actively addressing margin compression challenges. Meanwhile, we believe that potential margin compression for OldTown s fast moving consumer goods (FMCG) operations, arising from potentially higher cost of raw materials, is largely mitigated in the near term as the group has locked in contract prices for its coffee powder over the next seven months. There will be an uptick in its non-dairy creamer cost from Nov 2016 (as the group renewed its non-dairy creamer contract for a year till Oct 2017), which constitutes about 40% of its cost of goods sold, but management will seek to mitigate this through an improvement in cost efficiency. On a positive note, higher export sales have enabled the group to benefit from ringgit s weakness against USD and RMB. Table 8 : Selective raw material costs (sugar and coffee powder) USD/lb Jan-15 Mar-15 May-15 Source: Bloomberg Jul-15 Sep-15 Nov-15 Coffee (LHS) Jan-16 USD/lb 30 On the other hand, BAT has resorted to addressing margin compression issues by closing its manufacturing factory along Jalan Universiti, Petaling Jaya in stages up to 2HFY17 and has turned to sourcing tobacco products for the domestic market from other British American Tobacco Group s factories in the region. Although we believe that such move could help the group to improve its mid to longer term profitability, near term profit margins would be under pressure from the product outsourcing route. Mar-16 May-16 Jul-16 Sep-16 Nov-16 Raw Sugar (RHS) Jan-17 Mar Page 5

6 Industry Focus Malaysian Consumer M&A opportunities M&A opportunities for cash-rich companies? Given the current challenging operating environment for the sector, companies with healthy cash positions like OldTown and Sasbadi are looking for earnings-accretive acquisitions to boost their growth prospects. OldTown is actively pursuing M&A opportunities in F&B operations to enhance earnings while Sasbadi has openly stated its desire of making at least one value-accretive acquisition per annum to sustain growth. Recommendation Subdued recovery in consumer spending - not a mouth- watering sector. While we remain cautiously optimistic that consumer spending will continue along its recovery path this year, we do not foresee any significant re-rating catalysts for the overall sector at this juncture. As such, bottom up stock picking remains a preferred strategy to generate alpha returns. Notable changes in recommendations for consumer stocks under our coverage. As mentioned above, we recently downgraded BAT to Fully Valued and upgraded our call on MSM Malaysia Holdings to HOLD. We are also putting our recommendation and TP for Padini under review, pending the upcoming management meeting. Stock picks. Given the concerns outlined above, we favour stocks with (1) resilient business models, (2) established brand names in their respective sectors to withstand the continued challenging operating environment, (3) strong balance sheets to undertake earnings-accretive M&A activities to drive growth and/or engage in capital-management exercises to reward shareholders, (4) regional exposure to mitigate (potential) domestic earnings risks, and (5) attractive value propositions. OldTown (BUY, TP: RM ) remains our top pick for the sector. Table 9: Peer Comparison CY2016/2017 P/E EPS Growth (YoY) Dividend Yield Price/ BVPS ROAE Recomme Target Current Market ndation Price Price Cap CY2017 CY2018 CY2017 CY2018 CY2017 CY2018 CY2017 CY2018 CY2017 CY2018 British American FULLY , x 20.3x (6%) 4% 4.8% 4.7% 31.3x 30.5x 135% 157% Tobacco VALUED MSM Malaysia HOLD , x 14.9x 46% 19% 3.2% 4.4% 1.7x 1.4x 9% 10% Oldtown BUY , x 16.8x 10% 4% 3.5% 2.6% 2.1x 2.6x 17% 16% Padini BUY , x 11.1x 7% 9% 3.9% 3.4% 2.8x 2.7x 28% 26% Petronas Dagangan HOLD , x 24.9x (2%) 5% 2.9% 3.0% 4.4x 4.2x 17% 17% Sasbadi Holdings BUY x 14.5x 31% 24% 3.3% 3.4% 2.2x 2.3x 15% 17% QL Resources HOLD , x 19.8x 16% 20% 1.3% 1.5% 2.9x 2.7x 13% 15% Total / weighted avg 49, x 20.9x 4% 8% 3.4% 3.5% 10.7x 10.4x 47% 53% Sources: AllianceDBS, Bloomberg Finance L.P Page 6

7 Industry Focus Malaysian Consumer Company Guides Page 7

8 Malaysia Company Guide British American Tobacco Version 6 Bloomberg: ROTH MK Reuters: BATO.KL Refer to important disclosures at the end of this report DBS Group Research. Equity 22 Mar 2017 FULLY VALUED (Downgrade from Hold) Last Traded Price ( 21 Mar 2017): RM47.70 (KLCI : 1,754.67) Price Target 12-mth mth: RM41.70 (-13% downside) (Prev RM41.70) Potential Catalyst: Negative. Persistently high percentage of illicit trades Where we differ: Lower than consensus on lower GP margins Analyst King Yoong CHEAH cheahky@alliancedbs.com What s New FY16 results were within expectations Increasingly cautious of its outlook; cut FY17-18F earnings by 16-14% on lower margins Downgrade to FULLY VALUED with lower TP of RM41.70 Price Relative RM Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 British American Tobacco (LHS) Relative KLCI (RHS) Relative Index Forecasts and Valuation FY Dec (RM m) 2015A 2016A 2017F 2018F Revenue 4,582 3,756 3,717 3,767 EBITDA 1, Pre-tax Profit 1, Net Profit Net Pft (Pre Ex.) Net Pft Gth (Pre-ex) (%) 0.9 (24.5) (6.2) 3.9 EPS (sen) EPS Pre Ex. (sen) EPS Gth Pre Ex (%) 1 (24) (6) 4 Diluted EPS (sen) Net DPS (sen) BV Per Share (sen) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) 0.5 CASH ROAE (%) Earnings Rev (%): Consensus EPS (sen sen): Other Broker Recs: B: 5 S: 4 H: 11 Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P Outlook still smoky and hazy Downgrade to FULLY VALUED. We downgrade our recommendation for British American Tobacco (BAT) to FULLY VALUED in view of (1) sluggish topline recovery due to challenging industry prospects, in particular the persistently high proportion (>50%) of illicit trades, (2) profit margin being under pressure in 2017 as the group is starting to source tobacco products for the domestic market from other British American Tobacco Group s factories in the region, and (3) PE could derate being a pure trading company. Increasingly challenging sector landscape. The sector landscape is getting increasingly difficult due to: (1) declining cigarette consumption per capita because of an increasing healthconscious population; (2) continued high proportion of illicit trades; (3) regulatory risks; and (4) emergence of alternative product offerings such as e-cigarettes. Cut forward earnings forecasts by 16-14%. Although FY16 earnings came in within expectations, we are increasingly concerned about the group s earnings prospects in view of the persistently high illicit trades and thinning profit margins. We cut our FY17-18F earnings by 16-14% as we increase our illicit trades assumption (from 43% to 48% and lower our GP margin assumptions from 34% to 32%. Valuation: Post earnings adjustments, we downgrade our recommendation to FULLY VALUED with a lower DCF-based TP of RM Our TP implied a forward PE of 19x, which we deem to remain rich for a pure trading company. Although the share price could be supported in the near term with the upcoming 4Q DPS payout of RM1.23 (interim + special), we believe that cloudy earnings outlook would cap its upside potential. Key Risks to Our View: Sharp drop in illicit trades and strong recovery in legal cigarette market could pose upside risk to our recommendation. At A Glance Issued Capital (m shrs) 286 Mkt. Cap (RMm/US$m) 13,620 / 3,076 Major Shareholders (%) British American Tobacco BV (%) 50 Skim ASB 6.3 Aberdeen Assets 5.0 Free Float (%) m Avg. Daily Val (US$m) 2.9 ICB Industry : Consumer Goods / Tobacco ed: JS / sa:bc, PY

9 British American Tobacco WHAT S NEW Within expectations FY16 results met expectations. Stripping off various non-core adjustments including disposal gains of RM159m and restructuring cost of RM27m, the group s 4QFY16 core net profit declined by 18% y-o-y to RM164m. The fall in earnings was attributed to its top-line declining by 18% on the back of the sharp drop in domestic sales volume (-28% y-o-y). This brings its full year core earnings to RM687m, which was within our expectations. The group declared final net DPS of RM1.23 (special: 46sen, interim: 77sen), going ex on 9 March and payment on 23 March. This brings its total dividend payout to RM2.78, implying a payout ratio of 110% based on reported earnings. Illicit trades exceeded 50%. Management highlighted that the sales volume was weighed down by illicit trades, which reached a record high of 51.2% in June 2016 from 35.5% in August This was triggered by the c.40% excise duty hike in Nov 2015, which reduced the affordability of smokers. We understand that the illicit trades have continued to rise and could have hit 55% recently. Other key takeaways from the briefing: Restructuring plan on track. The group is closing its manufacturing factory along Jalan Universiti, Petaling Jaya in stages up to 1HFY17. It will resort to sourcing tobacco products for the domestic market from other British American Tobacco Group s factories in the region, from mainly Indonesia and some from Singapore. The group will relocate to a new office at Wisma Guocoland in Damansara Heights, KL by August Cut forward earnings forecasts by 16-14%. Although FY16 earnings came in within expectations, we have increasingly concerns about the group s earnings prospects in view of (1) persistently high illicit trades, (2) profit margins could come under pressure in 2017 as the group is starting to source tobacco products for the domestic market from other British American Tobacco Group s factories in the region. We cut our FY17-18 earnings forecasts by 16-14% as we increase our illicit trades assumptions (from 43% to 48%) and lower our GP margin assumptions from 34% to 32%. Lower TP, downgrade to FULLY VALUED. Post earnings cut, we downgrade our recommendation for British American Tobacco (BAT) to Fully Valued with a lower DCF-based TP of RM Quarterly / Interim Income Statement (RMm) FY Dec 4Q2015 3Q2016 4Q2016 % chg yoy % chg qoq Revenue 1, (20.5) (9.8) Cost of Goods Sold (686) (609) (573) (16.5) (6.0) Gross Profit (28.0) (17.1) Other Oper. (Exp)/Inc (93.4) (73.0) (76.6) (18.0) 4.9 Operating Profit (31.4) (23.6) Other Non Opg (Exp)/Inc nm nm Associates & JV Inc nm nm Net Interest (Exp)/Inc (1.0) (3.0) 0.07 nm nm Exceptional Gain/(Loss) (5.2) (2.9) 125 nm nm Pre-tax Profit Tax (78.0) (35.8) (27.2) (65.2) (24.0) Minority Interest nm nm Net Profit Net profit bef Except (17.8) (22.4) EBITDA (32.9) (22.6) Margins (%) Gross Margins Opg Profit Margins Net Profit Margins Source of all data: Company, AllianceDBS Page 9

10 British American Tobacco CRITICAL DATA POINTS TO WATCH Earnings Drivers: Pricing policy remains its key earnings driver. Operating in an oligopoly industry with three leading players (BAT, JTI and Philip Morris International) in the legalised market, the ability of BAT to raise prices to pass on increased costs (mainly arising from sin tax hikes), without affecting its market share and profit remains its key earnings driver. Commanding position helps to influence market pricing. BAT has a commanding market share of >55% in the legalised market in Malaysia. Such a dominant position has, to some extent, allowed the group to be a price leader rather than a price taker. Ability to adjust its pricing strategy to maintain its earnings growth is fast eroding. Over the years, the group s profit margins and absolute earnings had been improving, driven by effective pricing policy and increased productivity. Nonetheless, we observe that the ability to adjust its pricing strategy to maintain its profit growth is fast eroding, judging from its latest quarterly results, which were affected by the c.40% hike in excise duty back in Nov Domestic Legitimate trade volume (bn sticks) A 2015A 2016F 2017F 2018F Illicit trade market share (%) A 2015A 2016F 2017F 2018F Total revenue (RM m) High illicit trades and alternatives could drag earnings. Given BAT s dominant position in the legalised cigarette market, the high illicit trades continue to be a drag on its earnings growth. Despite recent strong enforcement activities by the authorities, illicit trades remain high with >50% estimated total market share. Besides that, the increasing popularity of other product offerings such as e-cigarettes could pose a new challenge to the industry. Industry prospects to be increasingly challenging. We are negative on the Malaysian tobacco industry as the sector landscape remains increasingly challenging due to: (1) declining cigarette consumption per capita because of an increasingly health-conscious population; (2) continued high illicit trades; (3) regulatory risks; and (4) emergence of alternative product offerings such as e-cigarettes A 2015A 2016F 2017F 2018F Gross margin (%) A 2015A 2016F 2017F 2018F Page 10

11 British American Tobacco Balance Sheet: Healthy balance sheet. The group s balance sheet remains healthy despite net gearing position of about 0.5x, given the strong cash generation of its business, which allows the group to comfortably meet its debt obligations and maintain a high dividend payout without overstretching its balance sheet. Share Price Drivers: Decent dividend yield. Despite the increasingly challenging industry outlook, BAT is viewed as a relatively defensive stock, given its ability to sustain high cash flow generation, and provide decent dividend yields of about 5%. Key Risks: High illicit trade. Counterfeit and smuggled cigarettes could continue to cap domestic sales volume. High taxes. The government may increase taxes on cigarettes, in line with plans to improve public health. Company Background BAT is the leading manufacturer and distributor of cigarettes in Malaysia. Its portfolio includes Dunhill, Pall Mall and Kent. The group has a c.60% legal market share in Malaysia. Leverage & Asset Turnover (x) A 2015A 2016F 2017F 2018F Gross Debt to Equity (LHS) Asset Turnover (RHS) Capital Expenditure RMm A 2015A 2016F 2017F 2018F Capital Expenditure (-) 160.0% 140.0% 120.0% 100.0% 80.0% 60.0% 40.0% 20.0% ROE (%) % 2014A 2015A 2016F 2017F 2018F (x) Forward PE Band (x) sd: 24.4x +1sd: 22.9x Avg: 21.4x -1sd: 20x -2sd: 18.5x 16.4 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 (x) 45.0 PB Band (x) sd: 41.73x +1sd: 37.13x Avg: 32.53x -1sd: 27.93x -2sd: 23.34x 20.0 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Page 11

12 British American Tobacco Key Assumptions FY Dec 2014A 2015A 2016F 2017F 2018F Domestic Legitimate trade volume (bn sticks) Illicit trade market share (%) Total revenue (RM m) 4,796 4,582 3,756 3,717 3,767 Gross margin (%) Income Statement (RMm) FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 4,796 4,582 3,756 3,717 3,767 Cost of Goods Sold (3,084) (2,907) (2,487) (2,543) (2,557) Gross Profit 1,712 1,674 1,270 1,174 1,210 Other Opng (Exp)/Inc (480) (436) (389) (312) (316) Operating Profit 1,232 1, Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc (13.2) (6.7) (6.0) (1.5) 0.25 Exceptional Gain/(Loss) Pre-tax Profit 1,219 1, Tax (317) (321) (187) (215) (223) Minority Interest Preference Dividend Net Profit Net Profit before Except EBITDA 1,277 1, Growth Revenue Gth (%) 6.2 (4.5) (18.0) (1.0) 1.3 EBITDA Gth (%) (29.4) (3.6) 3.7 Opg Profit Gth (%) (28.9) (2.2) 3.7 Net Profit Gth (Pre-ex) (%) (24.5) (6.2) 3.9 Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) NM Page 12

13 British American Tobacco Quarterly / Interim Income Statement (RMm) FY Dec 4Q2015 1Q2016 2Q Q2016 4Q2016 Revenue 1,058 1, Cost of Goods Sold (686) (668) (638) (609) (573) Gross Profit Other Oper. (Exp)/Inc (93.4) (122) (117) (73.0) (76.6) Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc (1.0) (2.5) (0.5) (3.0) 0.07 Exceptional Gain/(Loss) (5.2) 2.50 (90.9) (2.9) 125 Pre-tax Profit Tax (78.0) (55.6) (68.7) (35.8) (27.2) Minority Interest Net Profit Net profit bef Except EBITDA Growth Revenue Gth (%) (8.9) (3.5) (5.7) (3.2) (9.8) EBITDA Gth (%) (20.1) (16.6) (9.6) 15.0 (22.6) Opg Profit Gth (%) (20.6) (17.1) (10.0) 20.3 (23.6) Net Profit Gth (Pre-ex) (%) (23.0) (13.4) (19.8) 52.4 (22.4) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%) Balance Sheet (RMm) FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets 1,274 1,207 1,204 1,048 1,088 ST Debt Creditor Other Current Liab LT Debt Other LT Liabilities Shareholder s Equity Minority Interests Total Cap. & Liab. 1,274 1,207 1,204 1,048 1,088 Non-Cash Wkg. Capital Net Cash/(Debt) (350) (271) 14.0 (108) (77.7) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) CASH Net Debt/Equity ex MI (X) CASH Capex to Debt (%) (3.3) 3.0 (156.6) Z-Score (X) Page 13

14 British American Tobacco Cash Flow Statement (RMm) FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 1,219 1,231 1, Dep. & Amort Tax Paid (329) (399) (305) (215) (223) Assoc. & JV Inc/(loss) Chg in Wkg.Cap (3.1) Other Operating CF (0.3) Net Operating CF Capital Exp.(net) 11.7 (9.0) 204 (14.4) (14.4) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF (7.4) (5.7) Div Paid (882) (891) (776) (784) (631) Chg in Gross Debt (150) (55.0) Capital Issues Other Financing CF (15.6) (9.2) (8.5) (8.5) (8.5) Net Financing CF (1,048) (955) (785) (792) (639) Currency Adjustments Chg in Cash (55.6) (122) 30.1 Opg CFPS (sen) Free CFPS (sen) Target Price & Ratings History RM S.No. 12-mth Date of Closing Target Report Price Price Rating 1: 27 Apr HOLD 2: 09 Jun HOLD 3: 27 Jul FULLY VALUED 4: 25 Oct HOLD 5: 13 Dec HOLD 6: 17 Feb FULLY VALUED Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 Note : Share price and Target price are adjusted for corporate actions. Source: AllianceDBS Analyst: King Yoong CHEAH Page 14

15 Malaysia Company Guide MSM Malaysia Holdings Version 5 Bloomberg: MSM MK Reuters: MSMH.KL Refer to important disclosures at the end of this report DBS Group Research. Equity 22 Mar 2017 HOLD (Upgrade from fully valued) Last Traded Price ( 21 Mar 2017): RM4.47 (KLCI : 1,754.67) Price Target 12-mth mth: RM4.70 (5% upside) (Prev RM4.70) Potential Catalyst: Stronger ringgit, higher domestic volume Where we differ: In line with consensus Analyst King Yoong CHEAH cheahky@alliancedbs.com What s New Increased wholesale/retail ceiling prices for refined sugar by 7%/3% Increase forward earnings by 40-76% Upgrade to HOLD with higher TP of RM4.70 Price Relative RM Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 MSM Malaysia Holdings (LHS) Relative KLCI (RHS) Relative Index Forecasts and Valuation FY Dec (RM m) 2015A 2016A 2017F 2018F Revenue 2,307 2,658 2,935 3,063 EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) Net Pft Gth (Pre-ex) (%) 9.2 (57.0) EPS (sen) EPS Pre Ex. (sen) EPS Gth Pre Ex (%) 9 (57) Diluted EPS (sen) Net DPS (sen) BV Per Share (sen) PE (X) PE Pre Ex. (X) P/Cash Flow (X) nm EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): 0 0 Consensus EPS (sen sen): Other Broker Recs: B: 0 S: 2 H: 6 Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P Sugar rush Upgrade to HOLD with higher TP of RM4.7 R We upgrade our call for MSM to HOLD and raise our TP to RM4.70 upon revising upwards our 17F/18F earnings to reflect the increased average selling price announced by the authorities recently. Sugar price hike. The authorities have announced that with effect from 1 March, the maximum wholesale price and retail price for coarse grain white refined sugar would be raised to RM2.87/kg (+7%) and RM2.95/kg (+3.8%), respectively. We are not entirely surprised by such a move as it has been highlighted as one of the key upside risks to our previous recommendation. Bidding to be a regional player. MSM is building a new sugar refinery at Port Tanjung Pelepas (PTP), Johor, capable of producing 1.1m MT refined sugar p.a. The refinery is targeted to be completed in FY18, and will reportedly have 30-35% lower processing cost upon full capacity operation. But the refinery s margins will be lower than its existing operations, as it is intended to serve the competitive export market. Opening of Dubai i trading platform. MSM registered commodity gains of RM38m in YTD FY16 owing to the opening of its Dubai trading operations. The new trading platform will fully take over the role of purchasing raw sugar, which was previously done by MSM s refinery. This move allows MSM to improve the management of its cost (which can be volatile), in light of the fact that the trading platform provides better access to the global raw sugar market. Valuation: We upgrade our rating to HOLD with a higher TP of RM4.70 (RM3.00 previously), still pegged to a forward PE of 17x (5- year mean), following our earnings revision. Key Risks to Our View: Weaker ringgit against USD. Raw sugar costs, which make up c.82% of the group s opex, are transacted in USD. If the ringgit continues to weaken against the USD, this could put pressure on the group s bottomline. At A Glance Issued Capital (m shrs) 703 Mkt. Cap (RMm/US$m) 3,142 / 710 Major Shareholders (%) Felda Global Ventures Sugar 54.2 Koperasi Permodalan Felda 20.0 Employees Provident Fund 5.3 Free Float (%) m Avg. Daily Val (US$m) 0.08 ICB Industry : Consumer Goods / Food Producers ed: CK / sa:bc, PY

16 MSM Malaysia Holdings WHAT S NEW Reprieve from ceiling price hike Sugar price hike. The authorities have announced that with effect from 1 March, the maximum wholesale price and retail price for coarse grain white refined sugar would be raised to RM2.87/kg (+7%) and RM2.95/kg (+3.8%), respectively. This effectively means that MSM could sell its product to domestic wholesalers at the maximum price of RM2.87/kg. Given that the group is already charging its wholesalers at RM2.66/kg in 4QFY16, which is not far from its previous cap price of RM2.68/kg, we believe that the announcement is timely for the group to pass on the increased cost of raw sugar. wholesalers and industries) to RM2.76/kg and RM2.83/kg from RM2.61/kg previously. Upgrade TP and recommendation to HOLD. Following our earnings revisions, we upgrade our recommendation for the group to HOLD with a higher TP of RM4.70, pegged to an unchanged forward PE of 17x. Not entirely surprising news. We are not entirely surprised by such a move as it has been highlighted as one of the key upside risks to our previous FULLY VALUED recommendation. Raise forward earnings by 40%-76% 76%: We raise our FY17-18 earnings estimates by 40%-76%, upon raising our blended domestic average selling price of FY17-18 (for domestic Page 16

17 MSM Malaysia Holdings CRITICAL DATA POINTS TO WATCH Earnings Drivers: Topline growth mainly driven by ASP movements. We expect MSM s output to be relatively stable on a y-o-y basis, pending the completion of the new PTP sugar refinery in early FY18. Thus, topline growth will be driven largely by changes in blended ASP. This in turn is dependent on the sales mix, as the domestic wholesaler segment has the highest ASP, followed by the industries and exports segments. MSM s strategy is to run the refinery at an optimal utilisation rate (c.92%), and then sell whatever it can to the domestic and industries customers, and export the remainder of the output to foreign markets. We believe its next export focus will be Indonesia, given the establishment of a representative office in Jakarta in 1Q16. Blended domestic ASP to improve by 6% in FY17F. F. We forecast MSM s blended domestic ASP to improve by 6% to RM2.76/kg in FY16F, given the improvement in high-yielding domestic volume and recent ceiling price hike allowed by the authorities. The authorities have announced that with effect from 1 March 2017, the maximum wholesale price and retail price for coarse grain white refined sugar would be raised by RM2.87/kg (+7%) and RM2.95/kg (+3.8%), respectively. Volatile currency and raw sugar prices. Due to the weakened ringgit compared to previous years, we expect unit production cost to rise by 15% in FY17F, coupled with the recent higher raw sugar cost in USD. Unit production cost is assumed to improve gradually in FY18F as the Dubai office will fully be managing the purchases of raw sugar for the group, coupled with the completion of the new PTP sugar refinery. Regulatory approval to raise price. Given that pricing of the refined sugar has a domino effect on the domestic economy and is classified as a control item, the group will need to seek the authorities approval to raise the maximum domestic wholesale price it could charge for the group to raise its average selling price Domestic Volume (MT) A 2015A 2016A 2017F 2018F Industries Volume (MT) A 2015A 2016A 2017F 2018F Exports Volume (MT) A 2015A 2016A 2017F 2018F Blended ASP (RM/kg) A 2015A 2016A 2017F 2018F Production Cost (RM/kg) A 2015A 2016A 2017F 2018F Page 17

18 MSM Malaysia Holdings Balance Sheet: Gearing for expansion plan. Capex for the PTP sugar refinery is expected to cost USD260m, while maintenance capex is assumed to be c.rm40m p.a. We believe there is sufficient room for MSM to gear up to fund these capex commitments without cutting its dividend payout. MSM was in a net cash position in FY14, but registered a net gearing of 0.1x in FY16. We forecast MSM to record a net gearing of 0.2x/0.2x in FY17F and FY18F. Share Price Drivers: Earnings outlook. MSM s earnings outlook is a function of its blended ASP and unit production cost. Blended ASP is predominantly driven by the changing sales mix, as the domestic segment has the highest ASP, followed by industries and exports segments. Production cost is determined by raw sugar prices and forex rate (i.e. RM/USD). Proposed sugar refinery in PTP. The proposed sugar refinery in PTP could be a re-rating catalyst for the stock, as it could significantly increase the group s capacity (by adding another 1.1m MT in capacity), and lower its processing cost by 30-35%. However, this is a longer-term catalyst as the refinery is targeted to be completed only in early FY18. Additionally, the PTP plant s margins will be lower than the group s existing operations, as it is intended to serve the competitive export market. Leverage & Asset Turnover (x) A 2015A 2016A 2017F 2018F Gross Debt to Equity (LHS) Asset Turnover (RHS) Capital Expenditure RMm A 2015A 2016A 2017F 2018F Capital Expenditure (-) 14.0% 12.0% 10.0% 8.0% ROE (%) Key Risks: Weaker ringgit against USD. Raw sugar costs, which make up c.82% of the group s opex, are transacted in USD. If the ringgit continues to weaken against the USD, this could put pressure on the group s bottomline. Company Background MSM is a major sugar producer in Malaysia with an annual capacity of over 1.1m tonnes. It produces, markets and sells refined sugar products. 6.0% 4.0% 2.0% 0.0% (x) A 2015A 2016A 2017F 2018F Forward PE Band (x) +2sd: 26.8x +1sd: 22.1x 17.0 Avg: 17.3x sd: 12.6x 7.0-2sd: 7.8x Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 (x) 2.3 PB Band (x) sd: 2x +1sd: 1.9x Avg: 1.79x -1sd: 1.69x -2sd: 1.58x 1.4 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Page 18

19 MSM Malaysia Holdings Key Assumptions FY Dec 2014A 2015A 2016A 2017F 2018F Domestic Volume (MT) 455, , , , ,319 Industries Volume (MT) 346, , , , ,352 Exports Volume (MT) 187, , , , ,610 Blended ASP (RM/kg) Production Cost (RM/kg) Income Statement (RMm) FY Dec 2014A 2015A 2016A 2017F 2018F Revenue 2,281 2,307 2,658 2,935 3,063 Cost of Goods Sold (1,814) (1,818) (2,328) (2,510) (2,585) Gross Profit Other Opng (Exp)/Inc (132) (112) (174) (202) (208) Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc (7.9) (2.3) (6.4) Exceptional Gain/(Loss) Pre-tax Profit Tax (87.3) (96.8) (27.8) (44.1) (52.7) Minority Interest Preference Dividend Net Profit Net Profit before Except EBITDA Growth Revenue Gth (%) EBITDA Gth (%) (2.2) 9.5 (52.4) Opg Profit Gth (%) (3.9) 12.6 (58.5) Net Profit Gth (Pre-ex) (%) (57.0) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) NM NM Page 19

20 MSM Malaysia Holdings Quarterly / Interim Income Statement (RMm) FY Dec 4Q2015 1Q2016 2Q Q2016 4Q2016 Revenue Cost of Goods Sold (545) (450) (548) (556) (774) Gross Profit Other Oper. (Exp)/Inc (22.1) (41.3) (51.3) (42.8) (38.8) Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc 0.10 (1.7) (3.6) (1.3) (1.4) Exceptional Gain/(Loss) Pre-tax Profit Tax (30.5) (1.2) (7.4) (9.5) (9.7) Minority Interest Net Profit Net profit bef Except EBITDA Growth Revenue Gth (%) 21.5 (16.7) 14.6 (0.1) 32.4 EBITDA Gth (%) 29.3 (40.9) (37.7) (0.5) (7.4) Opg Profit Gth (%) 11.9 (35.9) (44.4) (1.7) (25.2) Net Profit Gth (Pre-ex) (%) 4.5 (11.1) (60.1) (1.6) (38.2) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%) Balance Sheet (RMm) FY Dec 2014A 2015A 2016A 2017F 2018F Net Fixed Assets ,176 1,336 Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets 2,518 2,723 2,994 3,325 3,631 ST Debt Creditor Other Current Liab LT Debt Other LT Liabilities Shareholder s Equity 1,945 2,042 1,978 2,084 2,180 Minority Interests Total Cap. & Liab. 2,518 2,723 2,994 3,325 3,631 Non-Cash Wkg. Capital Net Cash/(Debt) 222 (296) (349) (702) (793) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) CASH Net Debt/Equity ex MI (X) CASH Capex to Debt (%) Z-Score (X) Page 20

21 MSM Malaysia Holdings Cash Flow Statement (RMm) FY Dec 2014A 2015A 2016A 2017F 2018F Pre-Tax Profit Dep. & Amort Tax Paid (86.3) (96.8) (37.4) (44.1) (52.7) Assoc. & JV Inc/(loss) Chg in Wkg.Cap. (66.8) (332) 163 (69.6) (29.9) Other Operating CF 1.58 (81.5) Net Operating CF 240 (91.0) Capital Exp.(net) (82.2) (233) (199) (468) (250) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF (79.9) (232) (199) (468) (250) Div Paid (169) (183) (183) (70.6) (115) Chg in Gross Debt Capital Issues Other Financing CF (8.0) (11.2) Net Financing CF 42.7 (23.3) Currency Adjustments Chg in Cash 203 (346) 146 (153) 109 Opg CFPS (sen) Free CFPS (sen) 22.5 (46.2) 18.4 (40.2) 3.46 Target Price & Ratings History RM S.No. 12-mth Date of Closing Target Report Price Price Rating 1: 20 May HOLD 2: 05 Aug HOLD 3: 24 Aug HOLD 4: 22 Nov FULLY VALUED 5: 13 Dec FULLY VALUED 6: 23 Feb FULLY VALUED 7: 03 Mar HOLD Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 Note : Share price and Target price are adjusted for corporate actions. Source: AllianceDBS Analyst: King Yoong CHEAH Page 21

22 Malaysia Company Guide OldTown Berhad Version 10 Bloomberg: OTB MK Reuters: OLDT.KL Refer to important disclosures at the end of this report DBS Group Research. Equity 22 Mar 2017 BUY Last Traded Price ( 21 Mar 2017): RM2.65 (KLCI : 1,754.67) Price Target 12-mth mth: RM3.05 (15% upside) (Prev RM2.65) Potential Catalyst: Stronger-than-expected FMCG sales Where we differ: Earnings forecasts higher than consensus due to higher FMCG sales assumptions Analyst King Yoong CHEAH cheahky@alliancedbs.com What s New Should trade closer to its regional peers being an increasingly established regional player Re-peg to PE of 19x, below its average peer PE of 23x Maintain BUY with higher TP of RM3.05 Price Relative RM Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 OldTown Berhad (LHS) Relative KLCI (RHS) Relative Index Forecasts and Valuation FY Mar (RM m) 2016A 2017F 2018F 2019F Revenue EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) Net Pft Gth (Pre-ex) (%) EPS (sen) EPS Pre Ex. (sen) EPS Gth Pre Ex (%) Diluted EPS (sen) Net DPS (sen) BV Per Share (sen) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) Earnings Rev (%): (1) (3) (5) Consensus EPS (sen sen): Other Broker Recs: B: 7 S: 0 H: 0 Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P Let s top up your coffee Craving for a nice cup of coffee. We maintain our positive stance on OldTown Berhad (Oldtown) given that (1) the strong 3QFY17 results has reaffirmed our investment thesis that the group is firmly on a growth trajectory, (2) its valuation remains attractive despite the recent run-up, and (3) expansion to regional markets offers multi-year growth potentials. 3Q strong earnings, multi-year sustained growth path ahead. To recap, Oldtown has delivered a set of impressive quarterly figures. The group reported strong core earnings of RM24.4m for 3QFY17 (+119% y-o-y, +92% q-o-q), mainly boosted by 26% FMCG revenue y-o-y growth. We understand that the strong FMCG sales were mainly driven by > 1-fold revenue growth to the China market. Given that China sales still account for <15% of its total FMCG sales, we believe that its regional expansion story, particularly to the China market, offers Oldtown multi-year growth potentials. Potential M&A to enhance growth. On the other hand, management is actively pursuing 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. Valuation: We maintain our BUY call for the group with a higher TP of RM3.05 as we re-peg Oldtown to a higher PE of 19x (vs 16x previously), which is +1 SD above its mean. We believe that being a stock with multiyear-growth potentials and bright earnings prospects, Oldtown should deserve a higher PE. Furthermore, our target PE remains low relative to its regional peers average of 23x. Stripping out net cash, our target price implies a forward PE (ex-cash) valuation of about 16x. Key Risks to Our View: Weaker-than-expected consumer spending could be a drag on its F&B business. At A Glance Issued Capital (m shrs) 451 Mkt. Cap (RMm/US$m) 1,196 / 270 Major Shareholders (%) Old Town International 42.6 Mawer Global Fund 10.0 Free Float (%) m Avg. Daily Val (US$m) 0.39 ICB Industry : Consumer Goods / Beverages ed: CK / sa:bc, PY

23 OldTown Berhad WHAT S NEW Risk appetite could expand further We have revisited our investment thesis for Oldtown. Given that the bulk of the group s FMCG business (which now contributes >75% of the group s earnings) mainly comes from its promising regional presence, we believe that the stock should be traded closer to its regional peers. Furthermore, we believe that the stock could offer multi-year growth potentials, which support the case for it to be valued at about +1 SD above its mean. Table 1 : Position in Tmall under coffee mix powder category Regional expansions offer multi-year sustained growth potentials. To recap, we understand that Greater China (Mainland China, Hong Kong, Taiwan) now contributes 45% of its total FMCG sales, followed by Malaysia (35%), South East Asia (ex- Malaysia) (14%) and others (6%). Given that China alone sales still accounts for <15% of its total FMCG sales, we believe that its regional expansion story, particularly to the China market, offers Oldtown a multi-year growth trajectory. Although the group has only ventured directly into the China market since 3QCY14, its instant coffee mix products have been well received in China. At present, we gather e-commerce sales constitutes about 80% of Oldtown sales in the China market, where the group s distribute its products through three key online platforms: (1) Tmall, (2) Taobao, and (3) JD.com. According to a study done by Tmall, Oldtown s online flagship store in Tmall was ranked number 3 as of June 2016 based on coffee mix powder sales. Repeg at a PE of 19x. Maintain BUY. We maintain our BUY recommendation for the group with a higher TP of RM3.05 as we re-peg Oldtown to a higher PE of 19x (vs 16x previously), which is +1 SD above its mean. We believe that being a stock with multiyear-growth avenues and bright earnings prospects, Oldtown should deserve a higher PE. Furthermore, our target PE remains low relative to its regional peers average of 23x. Stripping out net cash, our target price implies a forward PE (ex-cash) valuation of 16x. Peers comparison table Call Target Current Price (LC) Price (LC) Mkt Cap (MYR m) EPS (FD) Growth (YoY) P/E (FD) Pric e/ BVPS Dividend Yield ROE CY2017 CY2018 CY2017 CY2018 CY2017 CY2018 CY2017 CY2018 CY2017 CY2018 Berjaya Food NR NR % 44% 20.1x 14.3x 1.7x 1.7x 2.2% 2.8% 5.5% 5.5% Bread Talk NR NR , % 13% 19.3x 17.0x 2.5x 2.3x 2.7% 2.5% 13.4% 13.4% Oldtown BUY , % 6% 17.2x 16.3x 2.9x 2.6x 2.5% 2.6% 16.7% 16.0% Super Group HOLD , % 7% 22.3x 26.5x 1.9x 2.4x 2.0% 2.2% 8.9% 9.0% Gourmet Master NR NR , % 20% 22.3x 18.6x 4.5x 3.9x 1.7% 2.1% 22.7% 22.7% Café De Coral HOLD , % 11% 27.2x 24.5x 4.4x 4.2x 3.1% 3.5% 16.4% 17.4% Total / weighted avg 22, % 13% 23.6x 22.1x 3.7x 3.5x 2.4% 2.7% 16.3% 16.6% Source: Bloomberg Finance L.P, AllianceDBS Page 23

24 OldTown Berhad CRITICAL DATA POINTS TO WATCH Earnings Drivers: FMCG sales to be its key earnings driver. FMCG revenue grew by 10.5% y-o-y in FY16. Management is targeting double-digit growth in FY17 while we have assumed FMCG sales volume to grow by 15% in FY17 with the China market being the key growth driver. We estimate that sales to China only represents <15% of its FMCG sales in 9MFY17, As such, we are positive that there is plenty of room for the group to boost export sales with the completion of the restructuring of its China distributorship in late Room to utilise its production capacity. The manufacturing plant in Tasek Industrial Estate, Ipoh, has an annual designed production capacity of 24k kg for instant coffee mix and instant tea mix, with only about 50% utilised so far. This provides room to accommodate rising demand without further capacity expansion. F&B challenging operating environment. On the other hand, we believe that the growth prospects of its F&B business remain challenging. The group operated 238 café outlets in Dec 2016, with 204 (86%) based in Malaysia. F&B potential M&A? As at 31 Dec 2016, the group had net cash of RM154m, and management may undertake M&As in the F&B space to enhance future growth. Although we understand that there is no attractive M&A target in sight at present, we will not be surprised if the group announces an acquisition before the end of this financial year. Given that Oldtown is likely to finance its acquisition with internal funds and the current challenging operating environment favours industry consolidation, we are positive that any potential M&A exercise will be earnings accretive for the group. Avg revenue/ self&partly owned outlet (RM k/yr) A 2016A 2017F 2018F 2019F Number of total outlets A 2016A 2017F 2018F 2019F FMCG sales volume (k kg) A 2016A 2017F 2018F 2019F FMCG ASP (RM) A 2016A 2017F 2018F 2019F Page 24

25 OldTown Berhad Balance Sheet: Strong balance sheet net cash position. As at 31 Dec 2016, Oldtown had a net cash position of RM154m, which allows the group to (1) sustain its dividend policy at a minimum 50% payout, (2) continue its share buyback scheme, and (3) undertake attractive M&A activities to expand its operations. Share Price Drivers: Profitability and prospects key share price drivers. We are positive that there is plenty of room for the group to boost its export sales with the completion of the restructuring of its China distributorship in late On the other hand, we believe its F&B operations are still facing challenges, although F&B earnings contribution to the group has declined over the years (20%-30% of group earnings). Leverage & Asset Turnover (x) A 2016A 2017F 2018F 2019F Gross Debt to Equity (LHS) Asset Turnover (RHS) RMm Capital Expenditure Key Risks: Increasing competition in F&B segment. Oldtown s cafe chain has been challenged by small specialty cafe chains in the local market since If the group fails to transform and adapt to rapidly changing consumer demand, the decline in F&B contributions will drag its overall earnings. Failure to pass on higher costs to consumers. Given that raw material costs make up over 30% of Oldtown s total operating cost, an unexpected swing in food commodity prices, e.g. due to changes in climate and government regulations, could result in a spike in the prices of key raw materials such as sugar, coffee beans, and flour % 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2015A 2016A 2017F 2018F 2019F Capital Expenditure (-) ROE (%) Company Background Oldtown is a regional cafe chain operator (F&B) and an established beverage manufacturer (FMCG) based in Malaysia. In FY16, the group derived 45% of its revenue from F&B and 55% from FMCG. 2.0% 0.0% 2015A 2016A 2017F 2018F 2019F 27.0 Forward PE Band (x) (x) sd: 22.3x sd: 18.7x Avg: 15.1x sd: 11.4x 9.0-2sd: 7.8x 7.0 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 (x) 3.4 PB Band (x) sd: 3.05x +1sd: 2.7x Avg: 2.35x -1sd: 2x -2sd: 1.64x 1.4 Apr-13 Apr-14 Apr-15 Apr-16 Page 25

26 OldTown Berhad Key Assumptions FY Mar 2015A 2016A 2017F 2018F 2019F Avg revenue/ self&partly owned outlet (RM k/yr) 1,073 1,035 1,087 1,141 1,198 Number of total outlets FMCG sales volume (k kg) 9,651 10,056 11,728 13,135 14,711 FMCG ASP (RM) Income Statement (RMm) FY Mar 2015A 2016A 2017F 2018F 2019F Revenue Cost of Goods Sold (256) (247) (271) (295) (310) Gross Profit Other Opng (Exp)/Inc (76.2) (75.6) (71.7) (74.7) (76.6) Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc (0.2) Net Interest (Exp)/Inc Exceptional Gain/(Loss) (1.1) (3.0) Pre-tax Profit Tax (15.1) (15.9) (21.0) (22.6) (23.2) Minority Interest (1.6) Preference Dividend Net Profit Net Profit before Except EBITDA Growth Revenue Gth (%) 4.1 (1.1) EBITDA Gth (%) (2.4) Opg Profit Gth (%) (1.9) Net Profit Gth (Pre-ex) (%) (0.2) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) NM NM NM NM NM Page 26

27 OldTown Berhad Quarterly / Interim Income Statement (RMm) FY Mar 3Q2016 4Q2016 1Q2017 2Q Q2017 Revenue Cost of Goods Sold (60.4) (65.9) (65.3) (65.3) (70.1) Gross Profit Other Oper. (Exp)/Inc (24.6) (15.0) (17.8) (18.0) (14.3) Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) 0.0 (3.0) Pre-tax Profit Tax (6.2) (2.2) (6.1) (3.8) (7.5) Minority Interest (0.1) (0.1) Net Profit Net profit bef Except EBITDA Growth Revenue Gth (%) (1.5) (3.2) 16.3 EBITDA Gth (%) (15.0) (14.4) 73.4 Opg Profit Gth (%) (16.1) (18.1) 93.8 Net Profit Gth (Pre-ex) (%) (15.0) 92.2 (34.8) (8.9) 92.3 Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%) Balance Sheet (RMm) FY Mar 2015A 2016A 2017F 2018F 2019F Net Fixed Assets Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets ST Debt Creditor Other Current Liab LT Debt Other LT Liabilities Shareholder s Equity Minority Interests Total Cap. & Liab Non-Cash Wkg. Capital Net Cash/(Debt) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) Z-Score (X) Strong balance sheetnet cash position Page 27

28 OldTown Berhad Cash Flow Statement (RMm) FY Mar 2015A 2016A 2017F 2018F 2019F Pre-Tax Profit Dep. & Amort Tax Paid (11.5) (15.7) (21.0) (22.6) (23.2) Assoc. & JV Inc/(loss) Chg in Wkg.Cap. (12.6) (14.5) (2.9) (2.4) (1.2) Other Operating CF (1.2) (1.5) (1.8) Net Operating CF Capital Exp.(net) (11.4) (10.6) (10.0) (10.0) (10.0) Other Invts.(net) (67.9) (15.0) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF (16.4) 6.50 (8.8) (8.0) (8.0) Div Paid (27.0) (26.8) (27.8) (32.4) (32.4) Chg in Gross Debt (5.4) (4.5) (3.8) Capital Issues (19.7) (0.4) Other Financing CF (4.8) (0.3) Net Financing CF (56.9) (32.0) (27.8) (32.4) (36.2) Currency Adjustments (5.3) (1.8) Chg in Cash (18.0) Opg CFPS (sen) Free CFPS (sen) Target Price & Ratings History RM Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 8 Note : Share price and Target price are adjusted for corporate actions S.No. Date of Report Closing Price 12-mth T arget Rating Price 1: 24 Mar BUY 2: 23 May BUY 3: 25 May BUY 4: 27 May BUY 5: 30 May BUY 6: 26 Aug BUY 7: 29 Aug BUY 8: 04 Oct BUY 9: 25 Nov BUY 10: 28 Nov BUY 11: 13 Dec BUY 12: 23 Feb BUY 13: 24 Feb BUY 14: 03 Mar BUY Source: AllianceDBS Analyst: King Yoong CHEAH Page 28

29 Malaysia Company Guide Petronas Dagangan Version 4 Bloomberg: PETD MK Reuters: PETR.KL Refer to important disclosures at the end of this report DBS Group Research. Equity 22 Mar 2017 HOLD Last Traded Price ( 21 Mar 2017): RM23.70 (KLCI : 1,749.41) Price Target 12-mth mth: RM24.92 (5% upside) Potential Catalyst: Stronger-than-expected sales volume, recovery in oil prices, reduction in opex Where we differ: In line with consensus Analyst King Yoong CHEAH cheahky@alliancedbs.com Price Relative Forecasts and Valuation FY Dec (RM m) 2015A 2016A 2017F 2018F Revenue 25,171 21,805 23,194 23,471 EBITDA 1,461 1,608 1,589 1,662 Pre-tax Profit 1,081 1,244 1,234 1,299 Net Profit Net Pft (Pre Ex.) Net Pft Gth (Pre-ex) (%) (1.5) 5.3 EPS (sen) EPS Pre Ex. (sen) EPS Gth Pre Ex (%) (2) 5 Diluted EPS (sen) Net DPS (sen) BV Per Share (sen) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) Earnings Rev (%): Consensus EPS (sen sen): Other Broker Recs: B: 2 S: 2 H: 4 Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P Not a time to pump to the brim Maintain HOLD. We are maintaining our FY17-18 earnings forecasts, as sales volume remains lacklustre with Petronas Dagangan Bhd (PDB) moderating its new station openings. Management expects oil prices to remain volatile in FY17, caused by the global crude oil supply-demand rebalancing. In the near term, we foresee earnings to be supported by continued cost management initiatives in mitigating the volatile oil prices. Volatile oil prices continue to cloud earnings visibility. Brent oil price has recovered by 16% to about USD57/barrel in 4Q16 (from USD49/barrel in 3Q16). Nonetheless, it has since retraced back to about USD49-51/barrel recently. If oil prices continue to drop, retail motorgas prices could be cut again under the automatic pricing mechanism (APM). This may lead to inventory losses and margin compression. Active stock management to mitigate earnings volatility. Nevertheless, we note that management had implemented better inventory management and brought down the average inventory turnaround days to approximately five days, compared to 10 days in the past. Curtailed expansion plan. Given the challenging operating environment, PDB has moderated its expansion to 5-10 stations p.a. (from 30 p.a. previously). Moreover, management has undertaken various measures to keep opex at RM m per quarter. The reduction in opex was mainly due to the variation in yearly bonus payment that resulted in lower manpower expenses, as well as lower advertising and promotional expenses. Valuation: Limited upside. Our HOLD rating for PDB is premised on the limited potential upside to our target price of RM24.92, which is pegged to 28x forward earnings, its 5-year mean historical PE valuation. Key Risks to Our View: Falling oil prices could lead to margin compression. PDB could incur inventory losses, and experience margin compression if crude prices fall sharply within a short period of time. At A Glance Issued Capital (m shrs) 993 Mkt. Cap (RMm/US$m) 23,545 / 5,318 Major Shareholders (%) Petroliam National Bhd 69.9 Employee Provident Fund 5.1 Free Float (%) 3m Avg. Daily Val (US$m) 2.4 ICB Industry : Oil & Gas / Oil & Gas Producers ed: CK / sa:bc, PY

30 Petronas Dagangan CRITICAL DATA POINTS TO WATCH Retail Volume (% y-o-y) Earnings Drivers: Retail volume to improve marginally. Sales of subsidised petroleum products (i.e. RON95 and RON97 motorgas, diesel), are classified under the retail segment, and distributed via PDB s network of petrol stations. At present, PDB operates >.1,100 petrol stations. Management plans to open 5-10 new petrol stations p.a. in FY17-18F. Despite the higher number of stations, retail volumes only grew by about 1% in 2016, dragged by diesel sales which were affected by the Ops Titik enforcement activities (to curb the illegal smuggling of subsidised diesel to neighbouring countries) and implementation of the managed float pricing mechanism since Dec Commercial Volume (% y-o-y) We expect PDB s retail volume to marginally grow by 1.5% p.a. in FY17-18F, which is not particularly exciting. Commercial volume to grow by 2% p.a. in FY17-18F. 18F. Commercial business comprises the sale of unsubsidised petroleum products, and is predominantly made up of four key products: diesel, aviation fuel, bitumen and fuel oil. LPG Volume (% y-o-y) Commercial volume sales rose about 1% in FY16. We expect commercial volume to further grow by 2% p.a. in FY17-18F. Higher volume sales can come from resumption of aviation traffic growth, economic growth, and large-scale road construction activities. Other segments insignificant contributions. Other segments remain weak, but growth trajectory should be higher in the future. LPG sales fell by 1.4% y-o-y in FY16, dragged by sales in both the household and bulk segments, while lubricant sales increased by 4% y-o-y in the same period, as consumptions reverted to growth post fading effect of GST. We forecast LPG growth to normalise to 1% p.a. in FY17-18F, driven by bulk LPG sales, which is still seeing demand growth from SME and hospitality users. We expect lubricants sales to normalise to 5% p.a. in FY17-18F, backed by higher sales volume from Perodua, Naza Kia, along with the marine and plantation segments. Lubricant Volume (% y-o-y) Gross Margin (%) Page 30

31 Petronas Dagangan Balance Sheet: Strong balance sheet position. We expect PDB to stay net cash in FY17-18F, helped by strong operating cash flow of RM bn p.a., which far exceeds its capex of <RM500m p.a. PDB ended FY14 with a cash pile of RM2.4bn, which allows the group to engage in high dividend payout (>70%) and continue its expansion plan. Share Price Drivers: Oil price outlook. Oil price fluctuations could significantly affect PDB s retail margins, due to inventory gains/losses. Petroleum products retail prices are set based on the average Mean of Platts Singapore (MOPS) price in the previous month, but PDB s net revenue for the retail products are linked to the average MOPS price in the transacted month itself, as government will levy a duty/compensate PDB to remove the difference. Thus, PDB will achieve lower ASP and face margin compression in the event of a sharp decline in oil prices, and vice versa. Key Risks: Falling oil prices could lead to margin compression. PDB could experience margin compression, if crude prices continue to trend down. This could be a drag on PDB s earnings going forward. Expansion plan will raise opex and start-up losses. Management remains committed to expanding its network by outlets annually. We concur with management that this would benefit PDB in the long run, but the new petrol stations could continue to drive up opex and start-up losses. Company Background PDB sells petroleum products through its domestic service station operations. The group also has aviation fuelling operations at KLIA and bunkering facilities at Westports, along with marketing and lubricants distribution. Leverage & Asset Turnover (x) Capital Expenditure ROE (%) Forward PE Band (x) PB Band (x) Page 31