Proposed private placement of up to 33m new shares
Yesterday, Oldtown proposed to undertake a private placement of up to 33m new shares to investors to be identified later. In general, we are POSITVE on this development as we believe the funds raised will be utilised to fund its future business expansion, particularly its café chain business, which will contribute positively to its earnings over the mid to long term, although we might see near term earnings dilution of up to 10%. As such, we retain our BUY recommendation with unchanged TP of RM2.49, based on CY13 P/E of 15x.

What’s in the news

 Yesterday, Oldtown proposed to undertake a private placement of up to 33m new shares (10% of its existing outstanding shares) to investors to be identified later.

 According to the announcement, the issue price will NOT be discounted by more than 10% to the 5-day volume-weighted average market price of Oldtown shares, immediately prior to the price-fixing date.

 In any event, the placement shares will not be placed out to, (1) a director, major shareholder or chief executive of Oldtown (Interested Person), (2) a person connected with an Interested Person; and (3) nominee corporations, unless the names of the ultimate beneficiaries are disclosed.

 The proposed private placement may be implemented in separate tranches and at different issue prices for each tranche within 6 months from the date of Bursa Securities’ approval for the proposed private placement, or any extended period as may be approved by Bursa Securities.

 Approximately 70% of the fund raised will be used to fund its future business expansion in both the domestic and international markets, while the remaining 30% will be utilised as working capital, after netting off the estimated expenses related to this corporate exercise.

 Lastly, the proposed private placement is expected to be completed in 4Q2012.

Our comments

 In general, we are POSITIVE on this development, although we believe the company can actually use cheaper source of funds, i.e. borrowings as the group currently has a strong balance sheet with net cash of RM78.5m as at 30 June 2012.

 Although management does not elaborate further on its future capex plan in the announcement, we believe the funds raised will be mostly utilised for cafe chain expansion in overseas market (given its new FMCG capacity has yet to be fully taken up), which will contribute positively to its earnings over the mid to long term.

 For instance, Oldtown can now take a minority stake and participate more in its China cafe chain expansion with its stronger cash piles, instead of just earning franchisee's sales and royalty fees as the franchisor which have lower margin. To recap, Oldtown has awarded a 10-year master franchise license to a local partner which will cover Guangdong and Macau in 2011.

 Furthermore, we believe the group with stronger cash piles, could also expand its cafe chain business in other provinces of China based on JV business model, instead of master franchise model, which will yield better return for its shareholders, once it has get through its learning curve in China.

 Assuming the funds raised for the capex portion is RM42m (based on the issue price of RM1.84), it will be sufficient for the group to open up to 40 additional café outlets in China, based on the start-up cost of RM1m each. Currently, Oldtown has a target of 36 new outlets in China (mainly Guangdong and Macau) by 2014/2015, via the existing master franchise agreement.

 Apart from that, we foresee the potential placees will likely to be foreign investors, particularly Singapore and Hong Kong-based foreign funds as we understand that management has recently met a few foreign fund managers in both of these countries, which had shown strong interests in the company.

Valuation and recommendation

 In conclusion, we believe the funds raised from the proposed private placement will improve shareholders’ value over the mid to long term, although we might see near term earnings dilution of up to 10%.

 As such, we retain our Buy recommendation with a TP of RM2.49, based on CY13 P/E of 15x.