Singapore Company Guide BreadTalk Group Ltd
Bloomberg: BREAD SP | Reuters: BRET.SI Refer to important disclosures at the end of this report
DBS Group Research . Equity 4 Apr 2017 BUY Piping hot bread in the making (Re-instating Coverage) Last Traded Price ( 3 Apr 2017): S$1.36 (STI : 3,187.51) We see earnings recovering led by Foodcourt Price Target 12-mth: S$1.69 (25% upside) business which has turned around in 4Q16
Bakery’s cost rationalisation & better Din Tai Fung Potential Catalyst: Earnings turnaround sales mix will support operating margin expansion Analyst Alfie YEO +65 6682 3717 [email protected] Project 3-year CAGR growth of 63% for FY16-FY18F Andy SIM CFA +65 6682 3718 [email protected] Re-instating coverage with BUY and SOTP-based TP of S$1.69 backed by investment properties worth
Price Relative S$0.43 per share S$ Relative Index Foodcourt earnings has turned around in 4Q16 and 1.7 BreadTalk is poised for earnings growth 1.6 205 poised for growth. 1.5 185 this year. After dismal performances in FY15 and 1H16, we 1.4 1.3 165 saw a turnaround in 2H16 earnings. Its cost saving initiatives 1.2 145 1.1 125 led to margin improvements and we saw a recovery of its 1.0 105 0.9 Foodcourt business through outlet rationalisation in China. 0.8 85 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 We see earnings recovery momentum spilling over to FY17F.
Breadtalk Group Ltd (LHS) Relative STI (RHS) All three business segments are now better positioned for earnings growth. We forecast core earnings CAGR of 63% for Forecasts and Valuation FY Dec (S$m) 2015A 2016A 2017F 2018F FY16-FY18F on the back of earnings recovery and a low base. Revenue 624 615 643 673 Turnaround of its Foodcourt business in China, better Bakery EBITDA 80.9 80.0 93.1 97.8 cost efficiencies, and outlet expansion of high margin Din Tai Pre-tax Profit 25.4 29.7 47.2 41.4 Net Profit 7.60 11.4 26.3 23.0 Fung restaurants will collectively drive earnings growth in the Net Pft (Pre Ex.) 12.2 8.63 17.0 23.0 medium term. BreadTalk’s valuation based on its core business EPS (S cts) 2.70 4.07 9.34 8.19 (ex-property investments) is compelling at 18x FY17F PE. EPS Pre Ex. (S cts) 4.33 3.07 6.04 8.19 EPS Gth (%) (66) 50 130 (12) EPS Gth Pre Ex (%) (45) (29) 97 36 Share price backed by property investments worth Diluted EPS (S cts) 2.69 4.05 9.30 8.15 S$0.43 per share. The valuation of BreadTalk’s property Net DPS (S cts) 1.50 3.85 2.50 2.50 investments based on current market value implies an upside BV Per Share (S cts) 45.9 46.9 53.8 59.5 PE (X) 50.2 33.3 14.5 16.5 of 3% over their book value. BreadTalk has a track record of PE Pre Ex. (X) 31.3 44.1 22.5 16.5 monetising its property investments (111 Somerset and 112 P/Cash Flow (X) 5.7 4.3 4.4 4.5 Katong). Successful sale of property investments above market EV/EBITDA (X) 6.2 5.6 4.4 3.9 valuation is a possible share price catalyst. Net Div Yield (%) 1.1 2.8 1.8 1.8 P/Book Value (X) 3.0 2.9 2.5 2.3 Reinstate coverage with BUY and S$1.69 TP based on Net Debt/Equity (X) 0.7 0.3 0.0 CASH SOTP. We value BreadTalk’s core retail business at S$1.33 per ROAE (%) 6.0 8.8 18.6 14.5 share pegged to 22x PE, in line with peers. Together with
Consensus EPS (S cts): 5.90 7.90 property investments and net debt, BreadTalk’s TP is S$1.69, Other Broker Recs: B: 2 S: 0 H: 1 offering 25% upside. Reinstating coverage with a BUY recommendation ICB Industry : Consumer Services ICB Sector: Food & Drug Retailers Principal Business: BreadTalk is engaged in the operations and At A Glance franchising of bakery outlets, restaurants and food atrias. Issued Capital (m shrs) 281 Mkt. Cap (S$m/US$m) 381 / 273 Source of all data on this page: Company, DBS Bank, Major Shareholders (%) Bloomberg Finance L.P. Meng Tong Quek 34.0 Lih Leng Lee 18.6 Primary Investment 14.0 Free Float (%) 27.4 3m Avg. Daily Val (US$m) 0.21
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Company Guide
BreadTalk Group Ltd
INVESTMENT THESIS
Profile Rationale BreadTalk Group is a Singapore-based food and beverage We reinstate our coverage of BreadTalk with a Buy (F&B) group engaged in the operations and franchising of recommendation and S$1.69 TP based on SOTP. BreadTalk’s bakery/confectionery outlets, food courts and restaurants business is turning around with closure of non-performing across the region. BreadTalk’s portfolio currently has six Foodcourts in China, better sales mix at its restaurants, and brands – BreadTalk, ToastBox, Food Republic, Ramen Play, cost rationalisation at its bakeries. These are set to lift San Pou Tei and Din Tai Fung. It operates over 900 outlets margins and improve earnings quality. Our TP is backed by across 17 countries. S$0.43 per share worth of investment properties, with core earnings valued at 18x FY17 PE.
Valuation Risks Our TP of S$1.69 is derived from a sum-of-parts (SOTP) Food safety and licences. As a restaurant operator, it is valuation. On a per share basis, we value its retail business important to maintain food safety. Lapses would lead to at 22x FY17F PE at S$1.33, investment properties at S$0.43 reputational risks and in extreme cases, food operation based on market value, net debt at -S$0.07 per share. licences could be revoked.
Negative publicity affects consumer confidence and the marketability of its franchise. BreadTalk has had some negative publicity, especially in 2015 over food safety and food preparation procedures in Singapore and China. Incidences such as these can generate negative responses from the public which can potentially affect sales as well as the marketability of its franchise overseas.
Source: DBS Bank
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Company Guide BreadTalk Group Ltd
SWOT Analysis
Strengths Weakness Brand owner model. BreadTalk owns the BreadTalk brand Competition. There are many mid-range foodservice and has a franchise business model that franchises out the restaurants players in Singapore, each offering their own brand to third party franchisees. This offers scalable unique concepts. Direct and indirect competitors are chain expansion and BreadTalk has control over franchisees. casual-dining full-service F&B/restaurant groups such as Creative Eateries, Japan Foods, RE&S Enterprises, Katrina, Strong network across Asia. BreadTalk has established a Minor Food Group, Sakae Holdings, ABR Holdings, etc. strong presence across Asia. It has over 400 outlets in China Competitors in the Foodcourt space are Kopitiam, S-11, alone and is also present in Hong Kong and Taiwan. Its Koufu and competitors for bakery include Bengawan Solo relationships with landlords and franchisees allow the and Prima Deli. business to scale and grow quickly. Reputational risk. BreadTalk is one of the biggest brands Multibrand, multiformat portfolio. BreadTalk has various in Singapore with Euromonitor ranking it as the number brands and formats including BreadTalk and Toastbox for one player in Food/Drink/Tobacco specialist in Singapore. Bakery, Din Tai Fung (as a franchisee) and Ramen Play for The brand is also known regionally in North Asia and South Restaurants, Food Republic for Foodcourt. These allow East Asia. Reputational risk is at stake if consumers take to BreadTalk to grow using various penetration and multibrand social media for any operational lapses or negative issues. strategies to expand into malls, which also facilitates its collective bargaining power with landlords over rents as well. F&B business has low entry barriers. F&B foodservice businesses have low entry barriers. However, BreadTalk’s Innovation. BreadTalk innovates to stay ahead of the strong branding and economies of scale make it difficult competition. There are 50-60 new products and seasonal for new and smaller entrants to compete on cost and items to be launched in stages in the pipeline, which help to profitability. increase average cheque size and to drive more traffic into its bakery shops.
Cash-generative business. BreadTalk’s business generates operating cashflows of around S$65-90m annually. Working capital generally positive with cash collection at 35 days, payables at 144 days and inventory at 16 days.
Opportunities Threats Well positioned to capitalise on growing food consumption Negative publicity. Negative publicity could affect in Asia. According to Euromonitor, the market size for BreadTalk’s demand and support from its regular Food/Drink/Tobacco specialist retailers in Singapore and customers. In the past, BreadTalk had been alleged that it China is expect to grow at a CAGR of 1.7%-3.5% over the had not changed its doughnut frying oil for years in next 5 years. BreadTalk as a leading bakery retailer in Shenzhen. In Singapore, it also drew negative response on Singapore and regionally is well positioned to capture the social media in 2015 for promoting buns commemorating growing demand in the region. Mr Lee Kuan Yew after his death in addition to marketing soya bean milk from commercially available sources as Relationship with landlords. Partnership with retail mall freshly prepared. landlords to introduce food retail concept themes, will further entrench its position and raise barriers to entry in addition to Food safety and operating licence. The F&B business is collective bargaining of rents for all of its brands. licensed in Singapore by the National Environment Agency. Food safety and hygiene standards must be met. In extreme More opportunities to expand in China. BreadTalk has a cases of non-compliance, licences could be revoked. strong presence in China with 44% of stores located there. Going forward, the focus is to increase franchised bakery May be affected by disease outbreaks and poor weather. outlets faster than expanding self-operated own stores. Business could slow during a health crisis or poor weather Hence, there is more scope to increase store count in China. such as haze. During Singapore’s haze in October 2015, businesses were disrupted as consumers hid indoors. The Singapore government estimated that the haze had resulted in economic losses of about S$700m. Source: DBS Bank
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Company Guide
BreadTalk Group Ltd
Company Background
Singapore-based regional F&B restaurant brand owner and Revenue by business segment FY16 operator. BreadTalk Group is a Singapore-based food and beverage (F&B) group engaged in the operations and Food court 26% franchising of bakery/confectionery outlets, food courts and restaurants across the region. BreadTalk was listed on the SGX in 2003 and is today a regional F&B group which operates and franchises a total of 951 outlets. BreadTalk’s Bakery 50% portfolio currently has 6 brands – BreadTalk, ToastBox, Food Republic, Ramen Play, San Pou Tei and Din Tai Fung.
Outlet distribution by brand FY16 Restaurant 24% Din Tai Fung, San Pou Tei, 2, 24, 2% 0% RamenPlay, 6, Source: Company, DBS Bank Food Republic, 1% 57, 6% Innovative food concepts, streamlined to focus on next stage of growth. The Group has been in the forefront of food concepts and innovation, having introduced the boutique bakery concept in 2000. It was also the first to introduce the thematic food atrium where consumers are able to experience quality local food fare in a food court location. In 2010, it undertook a major review and organised the Group Breadtalk and toastbox, 862, into three divisions – Bakery, Restaurant and Food Atrium, to 91% pave the way for future growth. BreadTalk created its Source: Company, DBS Bank flagship pork floss bun in 2000, which remains one of its best-seller till today. 951 outlets under the group. BreadTalk operates and manages 862 owned and franchised bakeries, 32 Din Tai Revenue mainly from Singapore and China bakery business. Fung, Ramen Play and Sou Pou Tei restaurants in Singapore A majority of BreadTalk’s revenue is derived from the bakery and Thailand, as well as 57 Food Republic food atria in business and in Singapore and China. The bakery business China, Singapore, Hong Kong, Malaysia, Taiwan and comprising of BreadTalk and Toastbox contributed 50% of Thailand. BreadTalk currently operates c.260 bakery outlets Group revenue in for FY16 and has the most number of directly in addition to c.600 franchise outlets regionally. outlets across the three formats, with significant concentration in Singapore and China. Outlet distribution by country FY16 Revenue by geography FY16 Thailand, 6, 1% Singapore, 167, 18% Others 6% Hong Kong 11%
China, 423, 44%
Singapore 55% China Others, 355, 28% 37% Source: Company, DBS Bank Source: Company, DBS Bank A retail operator and franchisor of its own brands, and franchisee to other brands. BreadTalk operates in the consumer foodservice space and operates retail outlets for bakery products, Foodcourts and restaurants. Its retail operations comprise of a mix of 1) self-operated outlets for its own brands; 2) a retail operator as a franchisee for Din Tai Fung restaurants; and 3) a franchisor of its own brands such as BreadTalk to third party retail operators.
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Company Guide BreadTalk Group Ltd
Owns 30% equity stake in a JV with Jumbo Group to Property investments in Singapore and China worth S$130m. operate Jumbo Seafood outlets in Shanghai. BreadTalk owns BreadTalk holds some property investments on its books in 30% in a JV with Jumbo Group to operate seafood the form of investment securities. Key properties are mainly restaurants in Shanghai, China. As BreadTalk’s Chairman and AXA Tower, CHIJMES, 111 Somerset (sold in 1Q17), Beijing Founder Mr George Quek has extensive experience in Tongzhou and a property located in Shanghai Luidi. AXA operating in China, the collaboration with Jumbo leverages Tower, CHIJMES, 111 Somerset and Beijing Tongzhou are on BreadTalk’s operating and retail experience there to investments made in collaboration with Perennial. Shares in source for new and suitable locations for Jumbo Seafood CHIJMES are revalued under associates on the balance sheet, restaurants. The JV is limited to the Huadong area (华东区 – while investments held at cost on the balance sheet reflect defined by the provinces of Shandong, Jiangsu, Anhui, CHIJMES bonds, AXA Tower’s shares and bonds, and Beijing Zhejiang, Jiangxi, Fujian and Shanghai) and the opening and Tongzhou shares. BreadTalk also owns the BreadTalk IHQ operation of the Jumbo Seafood restaurant brand only. land on a leasehold basis for 30 years from 1 February 2010. Results for the JV are recognised in share of results in The IHQ which opened in 2013 houses its corporate office, associates. Other associates include Carl’s Jr China and research and development laboratories, training academy, CHIJMES. warehousing facilities and central kitchen operations.
Cost Breakdown FY16 Owns a 29% stake in CHIJMES
Perennial Real Breadtalk Others Estate 29% 51.61% 19.39%
Perennial (CHIJ MES) Pte Ltd 100% Pre 8 Inv estments Pte Ltd 100%
CHIJ M ES
Source: Company, DBS Bank estimates Source: Perennial Real Estate, Company, DBS Bank
Cost of Goods Sold (COGS), rents and staff costs make up Potential for properties to be sold. Perennial has a good track over 80% of total costs. We estimate that COGS make up record of selling properties. It previously sold 112 Katong in approximately 22% of total costs, with rents and staff costs 1Q16 and 111 Somerset in 1Q17 in which BreadTalk booked each making up approximately 30% of total expenses. COGS accounting gains of S$8.5m and S$9.3m respectively. comprise mainly of food inputs such as flour, wheat, oil etc. Potential sale of stakes in AXA Tower (5.31%), CHIJMES for Bakery and Restaurants. Depreciation is mainly renovation (29%) and Beijing Tongzhou in the future would provide for Foodcourts, Bakery and to a smaller extent Restaurants, additional catalysts for the stock. and is charged over a period of 2-6 years. Investment properties sold Properties Sold Cost Selling Accounting price Gain 112 Katong 1Q16 S$7.5m S$16m S$8.5m 111 Somerset 1Q17 S$17.2m S$26.5m S$9.3m Source: Company, DBS Bank
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Company Guide
BreadTalk Group Ltd
Value of property investments on BreadTalk’s books (excluding 111 Somerset sold in 1Q17) Securities Bonds Shares Cost Valuation Accounting classification AXA Tower (5.31%) S$8.496m S$10.875m S$19.4m S$23m Investment securities at cost CHIJMES (29%) S$18m S$22.685m S$18m S$41m Bonds as investment securities at cost, Shares as associates revalued at market Beijing Tongzhou Integrated Dev’t n/a S$34m S$34m S$34m Equity instruments (unquoted) at cost Shanghai Luidi Investment property n/a S$23m S$23m S$23m Investment property revalued at market Total S$94.4m S$121m Source: Company, DBS Bank
Operates a total of 951 owned and franchised outlets Division Bakery Food atrium Restaurant Brand BreadTalk & Toastbox Food Republic Din Tai Fung Ramen Play San Pou Tei Total Singapore 123 15 21 6 2 167 Hong Kong 24 5 - - - 29 China 394 29 - - - 423 Rest of the world 321 8 3 - - 332 Total 862 57 24 6 2 951 Source: Company, DBS Bank
Sales Trend Profitability Trend S$ m S$ m 47 700 20.0% 18.0% 42 600 16.0% 37 500 14.0% 32 400 12.0% 10.0% 27 300 8.0% 22 200 6.0% 4.0% 17 100 2.0% 12 0 0.0% 2014A 2015A 2016A 2017F 2018F 7 2014A 2015A 2016A 2017F 2018F
Total Revenue Revenue Growth (%) (YoY) Operating EBIT Pre tax Profit Net Profit
Source: Company, DBS Bank
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Company Guide BreadTalk Group Ltd
Competitive Strengths
Franchisor brand owner model for most of the brands it operates
Brand owner - has control over its own brands. BreadTalk is Relationships with landlords and developers provide a F&B brand owner of the BreadTalk, Food Republic, Ramen opportunities for new outlets. With more than 900 outlets Play and San Pou Tei brands. Being a brand owner allows across 17 countries, BreadTalk’s strong relationship with BreadTalk to have control over the growth and evolvement developers and landlords puts it in a favourable position to of the brand and its business. It is able to exercise control be offered new outlet space in new mall developments. This over its franchisees on how the brands are represented and is because it has the ability to help landlords fill up key F&B operated at franchisee outlets. Likewise, it is not subject to spaces quickly with a good mix of restaurants, bakery and requirements of the franchisor or at risk of franchisor Foodcourts. Therefore, BreadTalk will often be one of the recalling the franchise agreement. Its BreadTalk brand of first tenants to be offered shop units in new malls by bakeries has been successful in establishing franchisees landlords, enabling it to select more strategic shop units in across China, which enabled it grow quickly from 342 outlets the development. in FY09 to 951 outlets in FY16. Today, franchisee stores make up 70% or 602 of BreadTalk’s 862 self-operated and Diversified F&B brand portfolio franchised bakery stores. Multi-brand strategy. BreadTalk is a balanced mix of F&B Strong franchisee of Din Tai Fung’s restaurants. BreadTalk is brands. While these brands can grow together collectively in also a franchisee of other F&B brands (Michelin Star Din Tai malls, each of these brands also enables BreadTalk to target Fung chain of restaurants since 2003). Although a smaller different sub-segments of the foodservice market – contributor to revenue, its high operating margins (15.4% in restaurant for higher end consumers, bakery for staple F&B FY16) makes this segment a key contributor to operating consumption, Foodcourt for lower end foodservice profit. In FY16, segment operating profit was S$23.2m, customers, allowing BreadTalk to reach a larger customer forming 66% of group operating profit of S$35.3m. The base while capturing the market’s higher marginal propensity impressive numbers were generated from just 32 (3.4% of to spend on food. store count, 30 of 951 outlets) out of a total of 951 outlets in FY16. Entrenched in China
Economies of scale Well positioned to capitalise on demand in China. BreadTalk has been in China for more than 10 years and today has Leading F&B company in Singapore. BreadTalk is one of the close to 400 bakeries and 30 Foodcourts, contributing close largest bakery companies in Singapore. According to to one-third of revenue and 44% of total store count. It has Euromonitor, BreadTalk is ranked number one in a presence in tier 1 and 2 cities including Shanghai, Beijing, food/drink/tobacco specialists with 6% market share, ahead Tianjin, Chongqing, Xian, Shenzhen, Chengdu. According to of Prima Deli and Bengawan Solo. Euromonitor, China’s Food/Drink/Tobacco specialist retail space is expected to grow by a CAGR of 1.7% over the next Brand portfolio provides better bargaining power for rents. 5 years. BreadTalk’s F&B brands cut across the restaurant, bakery and Foodcourt foodservice sub-segments. Most of these F&B Innovative retail and food concepts to capture market offerings are commonly available in shopping malls. Unlike mono brand companies, it is able to undertake collective Innovation improves customer experience and stickiness. negotiations on outlet space with landlords for all its brands. BreadTalk differentiates itself with unique concepts and food Furthermore, it has presence in many malls and has extensive products, most notably is flagship pork floss bun. It has an relationships with developers and landlords. This is also a key R&D team to innovate new products. There are 50-60 new reason why Jumbo Group partnered BreadTalk in its China JV products and seasonal items to be launched in stages in the for the Huadong area. BreadTalk brands usually collectively pipeline, which help to increase average cheque size and to take up a decent portion of property space (Foodcourt drive more traffic into its bakery shops. It is also c.20,000 sqft, bakery c.600-800 sqft, restaurant c.3,000 experimenting with digital systems that inform customers sqft), enabling it to obtain rents at a competitive rate due to when a fresh batch of bread is ready. These initiatives help to scale. Rental rates will therefore be relatively more improve customer experience and stickiness. competitive than its smaller competitors.
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Company Guide
BreadTalk Group Ltd
Growth Strategies
Quality of earnings to improve
Less aggressive store expansion to concentrate on yielding Non-performing legacy franchisees. BreadTalk has been in higher operating efficiencies. Store count has grown the process of restructuring its list of franchisees by ending aggressively over the past few years (CAGR of 18% from agreements with non-performing franchisees including those FY09 to FY16), yet net profit has not grown in similar with legacy relationships. With this restructuring, we expect magnitude due to increase in operating costs including to see a stronger franchisee base with less drag from non- rental, depreciation and staff costs. There is currently a shift performing accounts. Following this portfolio restructuring, it in focus to make existing operations more efficient, lower will look to increase franchisee outlets with the stronger operating costs and expand margins. Therefore, store remaining partners. As franchise outlets have higher net opening in the next few quarters will not be aggressive. We margins, and lower direct operational risk, there is potential see FY17F as a year where BreadTalk repositions itself and for Bakery margins to increase as well given that franchise reorganises its operations internally to become more revenue is royalty income, recognised a percentage of efficient. franchisee sales with minimal costs to BreadTalk. Store increases this year will mostly be franchisee stores in Beijing Total store count has led by franchise outlets and Shanghai. We expect margins to increase when mix of franchise stores improve going forward. Store count 1,000 957 951 914 900 836 Food Atrium division has turned profitable in 4Q16 800 686 700 Changes to management personnel, tenant-mix and tentnat 600 534 quality has turned Foodcourt losses into profitability. 500 448 Foodcourt is the division that is expected make a marked 400 342 turnaround in FY17F. FY17F will start on a clean slate post 278 300 store closures and impairments made in FY16 (S$5-6m). The 200 200 business had overexpanded into tier 1 and 2 cities in China, 100 with only tier 1 cities’ Foodcourts outperforming tier 2 cities. 0 While Foodcourts in Singapore were profitable, Foodcourts in 07 08 09 10 11 12 13 14 15 16 Bakery Restaurants Food Courts Total tier 2 cities in China were a drag. Changes were made to the Source: Company, DBS Bank portfolio in FY16 by closing non-performing outlets especially in tier 3 cities. It also replaced China Foodcourt’s Expect cost efficiencies and margin improvement. We see management team with new personnel. There were changes margins improving at Group level. The swing to profitability made to tenant quality and tenant mix, which led to an at the Foodcourt business, cost savings initiatives at the improved performance and occupancy at its China bakery and improved sales mix from restaurant business Foodcourts. Foodcourt’s operating profit in 4Q16 had should collectively improve margins. We expect store already improved from a loss to a small profit. Store expansion to take on a more aggressive pace once cost openings this year will include Shenzhen, Guangdong and efficiencies and margin improvements are realised in the Shanghai. coming year or two. Restaurants continue to grow Bakery division to become more cost efficient New outlet in London this year. BreadTalk currently has 21 Driving margin improvement through cost efficiencies. Din Tai Fung outlets in Singapore, and 3 in Thailand. It has BreadTalk has already demonstrated that it has the ability to already planned for a new outlet in London this year through improve cost efficiency as FY16 gross margins had improved a JV (BreadTalk is the major shareholder of the JV) with Fairy to 54.9% y-o-y (+2.0ppts). Initiatives such as better demand Rise Development (Din Tai Fung franchise owner), Din Tai planning, more efficient human resource planning, tighter Fung Taiwan, a UK partner and a Taiwanese individual. We cost controls have helped to benefit operating margins. also see scope for more outlets in Thailand as there are Better demand planning has led to lower food wastage, currently only three Din Tai Fung restaurants. As restaurant while human resource efforts in overtime policies and tighter margins are attractive, better sales mix from restaurant scheduling of workers especially in the central kitchen have business would improve overall profitability. contributed to lower excessive wage payments. It has also been spending less on capex, leading to some moderation in depreciation expenses going forward.
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Company Guide BreadTalk Group Ltd
Industry landscape
Singapore China
Leading player in Singapore. According to Euromonitor, 1,344 bakery companies operating in a RMB262bn market in BreadTalk is the largest player as a Food/Drink/Tobacco China. According to Euromonitor, the Food/Drink/Tobacco specialist in Singapore. BreadTalk has 6% market share, specialist retailers market reached RMB262b in 2016, with leading Prima Deli and Bengawan Solo in the bakery space. Bakery specialists accounting for the largest share of sales within food/drink/tobacco specialists. There were 1,344 Leading Food/Drink/Tobacco Specialist in Singapore bakery companies competing in China as of June 2015 according to Bread and Cake Professional Committee of Breadtalk 6% Prima Deli China National Food Industry Association. Bakery players 5% include local players like Holiland, Ruby, and foreign players Bengawan Solo 4% such as 85C, Bakery Christine, and UBC Coffee from Taiwan, BreadTalk from Singapore, Paris Baguette, Tous Les Jours and Caffé Bene from Korea, Vie de France from Japan.
CAGR of 1.7% in the next five years. Euromonitor expects the Food/Drink/Tobacco specialists space to grow by 1.7% CAGR in the next five years and sees rising acceptance of the Western diet and the growing preference for diverse foods, Others 85% bread and cakes becoming popular for breakfast and snacks, Source: Euromonitor, DBS Bank especially among the younger generation. According to another report by Daxue Consulting, a market research and CAGR of 3.5% over the next five years. The management consulting firm focusing on the Chinese Food/Drink/Tobacco specialist space in Singapore is estimated market, it notes that there is scope for the market to grow as to be worth S$887m in 2016 by Euromonitor and it is the average annual consumption of bakery products per expected to grow at a CAGR of 3.5% from 2016 to 2021 capita in China is low at 5.83kg compared with close to driven by increase in selling space and sales per square feet. 22kg in Japan. The decline in sales from 2014 was affected by decline in number of outlets, selling space and sales per square feet, in Food/Drink/Tobacco space to grow by 1.7% CAGR till line with the weak GDP subject to a one-year lag. 2021F
RMBb Food/Drink/Tobacco space forecast to reach S$1.05b by 300
2021F 250
S$m 1,100 200
1,050 150
100 1,000 50 950
0 900
850 Source: Euromonitor, DBS Bank 800 2012 2013 2014 2015 2016F 2017F 2018F 2019F 2020F 2021F Source: Euromonitor, DBS Bank
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Company Guide
BreadTalk Group Ltd
Management composition
Professionally managed, led by founder. BreadTalk continues Focus to improve earnings quality. BreadTalk’s strategy in its to be led by its founder Mr George Quek who is the earlier years had been to grow its presence regionally. In Chairman of the Group, and is responsible for driving its particular, store count increased by 572 between 2010 and strategic direction and future development. His wife 2014. It adopted the franchise model, and licensed Katherine Lee is Deputy Chairman, and is responsible for franchisees regionally to grow its store network. While concept creation, product development and enhancement of revenue grew, margins and earnings had suffered in FY15 various brands both locally and globally. BreadTalk has a due to cost management issues. Loss making and poorer professional management team of executives comprising of performing outlets were consolidated in FY16, improving net former bankers and executives in F&B managing its day to profit margins as revenue declined. Management is now day operations. Key executives of BreadTalk are focused on improving the quality of earnings in the near compensated above S$250,000 annually. term before growing its regional footprint aggressively again.
Key Management Team Name and appointment Profile Mr. Oh Eng Lock Mr Oh oversees the Group’s global operations, focusing on strategic planning, investments, business Group CEO development and regional expansion. He was Regional MD at Merrill Lynch in Hong Kong, overseeing the North Asia businesses and has held senior executive and management posts at DBS Bank and UOB, growing their franchises in China, Taiwan and the USA. Mr Oh holds a Bachelor of Arts degree from the University of Singapore.
Mr. Chan Ying Jian Mr Chan is responsible for the Finance, Legal and Risks functions of BreadTalk. He was formerly Vice Group CFO President of Equity Research at J.P. Morgan Securities Singapore, as ASEAN Sector Head for Agri- Commodities and Consumer Staples. Mr Chan holds a double-degree in Business Management (majoring in Finance) and Accountancy from the SMU (summa cum laude – with Highest Distinction). He is also a Chartered Accountant of Singapore (CA Singapore) & Chartered Financial Analyst (CFA).
Mr. Janson Ong China Lock Mr Ong is responsible for the overall development, operations, projects execution and strategic CEO Food Atrium Division planning of the business globally. He has over 20 years of F&B experience, pioneering Singapore’s first food court business and initiating over 100 food court concepts 350 F&B outlets in ASEAN and Greater China. He joined the BreadTalk in 2003 as Director of Food Republic in China and was also MD for Food Republic in Hong Kong.
Mr. Tan Aik Peng Mr Tan joined BreadTalk as MD of the Bakery Division in 2014. He was previously Head of Corporate CEO Bakery Division Strategy, Planning and Business Development at SATS Ltd. He has an MBA from Nanyang Business School and also holds a Bachelor of Mechanical Engineering (Hons, 2nd Upper) and a Master of Engineering in Quality and Statistics from NUS.
Mr. Cheng William Mr Cheng leads BreadTalk’s business and marketing strategies, structure and people development at CEO Restaurant Division all Din Tai Fung and Ramen Play’s businesses in Singapore and Thailand. He has over 20 years of experience in culinary and operations and was previously Branch Manager at BreadTalk before the inception of Din Tai Fung in 2003.
Mr Frankie Quek Swee Heng Mr Quek is responsible for the formulation and implementation of the expansion plans for the Group CEO ASEAN Region in the ASEAN Region. He started out as the Group’s Assistant GM in 2001 before assuming various roles including GM, Head of Bakery ops in Shanghai and Beijing, Group COO and CEO for China Region. Mr Quek holds an honorary Master of Business Administration degree from the American University of Hawaii, USA. He is the brother of Chairman George Quek.
Source: Company, DBS Bank
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Company Guide BreadTalk Group Ltd
Key Risks
Negative publicity affects consumer confidence and the Food safety and licences. As a foodservice operator, it is marketability of its franchise. Food safety is an important important to maintain food safety. Lapses would lead to aspect of the foodservice sector. It not only affects the health reputational risks and in extreme cases, food operation of customers consuming BreadTalk’s food products, but it licences could be revoked. Other risks include food also influences the marketability of the franchise when contamination and tampering risks, outbreak of diseases or attracting new and capable franchisees. BreadTalk has had viruses in livestock inducing food scares, exposure to some negative publicity in especially in 2015. A China TV negative publicity, customer complaints and potential programme claimed that its Shenzhen outlet has not litigation. changed its doughnut frying oil for years. There were also other issues apart from food safety. In Singapore, it launched May be affected by disease outbreaks and poor weather. buns commemorating Mr Lee Kwan Yew after his death, Business could slow during a health crisis or poor weather which drew negative responses over social media. BreadTalk such as haze. During Singapore’s haze in October 2015, was however quick to stop the sale of those buns. BreadTalk businesses were disrupted as consumers hid indoors. The also apologised to the public after a photograph showing a Singapore government estimated that the haze had resulted staff member filling up “freshly prepared” soya milk for sale in economic losses of about S$700m. using commercially brand soya bean milk, made its rounds on the internet. Incidences such as these can generate negative responses from the public which can potentially affect sales as well as the marketability of its franchise overseas.
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Company Guide
BreadTalk Group Ltd
Financials
Profit and Loss around in 4Q16 with a small profit, and absence of segments write-offs of S$5-6m would improve segment earnings. A Profit growth driven by better cost management. Revenue sustained improvement in earnings from Foodcourt would lift has largely been driven by store count. However, EBIT margins going forward. We see higher mix from restaurant margins have fallen due to higher operating expenses as a sales over the next two years, and the higher margin nature result of store expansion. Over the last two years, there has of the restaurant business would lift overall margins. Expect been more focus on cost management to achieve better operating margins to increase to 6.6% by FY18F led by these store operating efficiencies. In FY16, gross margins and initiatives. operating cost management had improved through better control of food wastage, as well as better staff cost Balance sheet and cashflow management. Both gross margins and EBIT margins improved by 2ppts and 0.1ppt respectively. More effective Cash business, balance sheet currently in net debt. As with cost management strategies should continue to improve all foodservice companies, BreadTalk is a cash business. The margins that will ultimately drive earnings growth. We business generated S$65-90m of operating cashflows expect net profit to reach S$23.0m by FY18F. annually and S$28-54m of positive free cashflows in the last three years. Net debt as of end-Dec16 is about S$60.7m, More focused on cost and margins in recent years equivalent to approximately S$0.22 per share, or net debt ratio 0.3x. BreadTalk was in net cash till FY12 when it built Store count margin % Store count (LHS) EBIT Margins (RHS) its BreadTalk IHQ. In FY13 when it opened it IHQ, net debt 1200 7.0 was S$89m. It further issued S$75m of bonds in FY16 due 1 1000 6.0 April 2019 at 4.6% coupon for general corporate purposes, including refinancing of existing borrowings, and financing 5.0 800 capital expenditure and general working capital. 4.0 600 3.0 Strong cash position 400 2.0 S$m FY15 FY16 FY17F FY18F Operating cashflow 66.5 89.2 87.6 84.4 200 1.0 Collection days 33.5 35.4 34.5 34.6 0 0.0 Payable days 143.3 144.1 140.1 140.9 08 09 10 11 12 13 14 15 16 Net cash/(debt) (99.6) (43.5) (3.0) 34.4 Source: Company, DBS Bank Net cash/share (Scts) (35.4) (15.5) (1.1) 12.2 Source: Company, DBS Bank Revenue driven by operational efficiencies. Even though outlet growth is expected to be muted, revenue growth will Generates positive working capital cashflows. Outlets be led by more efficient store operating matrices such as provide foodservice for cash while operational scale allows it sales per square foot and sales per outlet. We expect sales procure supplies on credit. Inventory days are minimal due to per outlet to grow from S$0.65m to S$0.69m per year over the short shelf life and freshness of food inputs. Therefore, the next two years. We expect revenue to reach S$673m by the business generates positive working capital cashflows. FY18F. Even though business is on a cash basis, collection days are a result of payment lag by franchisees. Revenue assumptions S$m FY15 FY16 FY17F FY18F Higher capex requirement for Foodcourts due to larger floor Total outlets 957 951 962 969 area. Capex per store ranges from S$200,000 to S$300,000 Sales/outlet/yr (S$m) 0.65 0.65 0.67 0.69 for bakery, approximately S$1m for restaurant, S$2-3m for Source: Company, DBS Bank Foodcourts.
Expect margins to improve. We see margins improving over Capex the next few years from 1) increased mix of franchise outlets S$m Capex Avg Sqft Capex- Avg lease as opposed to owned bakery stores; 2) turnaround in psf Foodcourt operations; and 3) higher mix of restaurant Bakery S$2-300k 600-800 385 3 years business. Franchise stores have much higher margins Foodcourt S$3m 20,000 150 5-6 years compared to owned bakery stores due to the absence of Restaurants S$1m 3,000-4,000 285 4-5 years operating expenses. Change in store mix would see margin Source: Company, DBS Bank improvements. Meanwhile, Foodcourt business turned
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Company Guide BreadTalk Group Ltd
Improving ROAE Strong ROAE S$m FY15 FY16 FY17F FY18F ROAE to recover, driven by better margins. ROAE was as Revenue 624 615 643 673 high as 20% in FY14, but has fallen because of lower net Net profit 7.60 11.4 26.3 23.0 profit. However, we expect ROAE to head higher over the Net margin (%) 1.2 1.9 4.1 3.4 next two years on the back of earnings and margin Total assets 545 534 555 584 recovery. Equity 129 132 151 167 ROAE (%) 6.0 8.8 18.6 14.5 Source: Company, DBS Bank
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Company Guide
BreadTalk Group Ltd
Valuation and recommendation
Project earnings CAGR of 63%, led by more new franchise Reinstate coverage with BUY, SOTP-based TP of S$1.69. stores, turnaround of food court business. We see earnings The stock currently trades at 22.5x FY17F PE, which implies CAGR growth driven by more franchise stores and a that BreadTalk’s core business is valued at 18x PE (after turnaround of the loss making food atrium business. stripping out the value of its investments), a discount to Franchise stores generate high margins as there is minimal regional restaurants, QSRs, bakery and foodservice peer cost, and revenue recognised from these stores flows average of 23x. Our valuation of BreadTalk comprises of directly to operating profit. We see lower losses from food core F&B business which we value at S$1.33 based on 22x atrium business as it heads for a turnaround in profitability FY17F core PE, investments at S$0.43 based on book and within two years. Initiatives such as fine tuning tenant mix market value, and net debt worth S$0.07 per share. We to fill up vacant stalls are currently being implemented to derive a TP of S$1.69, representing 25% upside from the ensure that the food atrium business turns around. Finally, last closing price. Reinstate coverage with a BUY higher mix of Din Tai Fung restaurants will improve overall recommendation. margins. Core business valued at 18x forward PE at current Core earnings trades at average PE valuations share price (x) Component S$m Per share S$ 40.0 +2 sd BreadTalk’s share price 381 1.36 35.0 Value of investments -121.8 -0.43
30.0 +1 sd 111 Somerset -12.5 -0.04 25.0 Net debt / (cash) FY16 60.7 0.22
20.0 Avg Core share price ex investments 307.6 1.09
15.0 Core earnings S$m 17.0 0.06 -1 sd 10.0 Core PE ex investments 18.1 18.1
Source: Company, DBS Bank 5.0 -2 sd - SOTP valuation Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 SOTP breakdown S$ Basis Source: DBS Bank Core business based on PE 373.5 22x FY17F earnings Shanghai Luidi China Inv’t ppty 23.0 Based on book Beijing Tongzhou Investment 34.65 Based on cost AXA’s valuation within market range of S$1,700- Equity stake in CHIJMES 22.685 Based on book 2,100/NLA Value of AXA stake less debt 23 Market valuation Office buildings NLA Valuation Rate/NLA CHIJMES Bonds 18 Based on book CPF building 324,000 S$550m 1,698 Net (debt)/cash FY17F -20.2 Inc. Somerset disposal Twenty Anson 207,000 S$432m 2,086 Equity Value 475.1 Capital Tower 738,000 S$1,325m 1,795 No of shares 281 Mapletree Anson 332,000 S$690m 2,078 TP 1.69 AXA Tower 675,000 S$1,247m 1,847 Source: Company, DBS Bank Source: Company, DBS Bank
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Company Guide BreadTalk Group Ltd
Valuation of comparable office buildings Attributed Contract Property Name Location Tenure Net Lettable Price ($) Rate per NLA Buyer Date Area (sq ft) Jan-15 AXA Tower Tanjong 66.5 675,000 1,170,000,000 1,733 PREH Pagar remaining (2015) Jun-15 One Raffles Raffles Place 99/FH 600,000 1,429,166,667 2,382 OUECT Place Jun-15 PWC Building 8 Cross Street 99 LH 106,712 150,000,000 1,892 DBS Bank (30% stake) Dec-15 ICS Building 137 Cecil Freehold 67,550 210,000,000 3,109 Mr Zhou Street Dec-15 Suntec Tower Suntec 99 LH 38,352 101,560,000 2,648 Suntec REIT Two -12, 13 and 29 Floor Nov-15 CPF Building 79 Robinson 99 LH 324,000 550,000,000 1,698 Ascendas Land Road (2067) Apr-16 78 Shenton 78 Shenton 99 LH 181,100 301,500,000 1,665 Alpha Investment Way (50% Way Partners stake) May-16 Remaining 60% Raffles Place 57 703,122 1,600,500,000 2,276 (2,700 CCT interest in remaining assuming 99 CapitaGreen expiring year 31Mar2073 leasehold) May-16 Straits Trading 9 Battery 999 LH 158,897 560,000,000 3,524 Mr Tahir - Found of Building Road Mayapada Group Jun-16 Asia Square Marina Bay 99 LH from 1,200,000 3,400,000,000 2,668 Qatar Investment Tower 1 2007 sqft office & Authority 40,000 sqft retail Sep-16 110 Robinson 110 Robinson FH 14,233 45,100,000 3,169 Mr Tahir - Found of Road Road Mayapada Group Jan-17 GSH Plaza Raffles Place Remaining - 725,200,000 2,900 Fullshare Holdings 72 years Feb-17 PWC Building 8 Cross Street 78.5 years 355,704 747,000,000 2,100 Manulife (100% stake) Source: Various press reports, DBS Bank
Core earnings trade below regional peer average of 23x Market Operating Net Dividend Net Cap P/BV P/Sales ROE Margin Margin Yield Gearing Company (US$m) Px Last PE (Act) PE (Yr 1) PE(Yr 2) (x) (x) (%) (%) (%) (%) (x) BreadTalk Group Ltd 273 1.36 44.1x 22.5x 16.5x 2.5x 0.6x 19% 6.5% 4.1% 1.8% 0.02 Local & regional foodserv ice/bakery /restaurant play ers J ollibee F oods Corp 4,227 197.00 33.6x 28.4x 24.4x 5.4x 1.6x 20% 6.9% 5.8% 1.3% cash SPC Samlip Co Ltd 1,700 220,500 37.2x 30.5x 29.0x 6.3x 1.0x 17% 3.5% 2.6% 0.4% 0.52 MK Restaurant Group PCL 1,654 63.00 27.3x 24.9x 24.2x 4.3x 3.8x 16% 14.7% 13.9% 3.4% cash Gourmet Master Co Ltd 1,403 287.00 24.4x 20.7x 19.7x 5.0x 1.9x 20% 10.5% 7.9% 0.8% cash Berjaya Corporation Bhd 423 0.37 NULL NaN NaN 0.2x 0.2x -3% 6.7% -1.8% na cash JUMBO Group Ltd 326 0.71 25.3x 22.6x 20.1x 6.1x 3.1x 29% 15.6% 13.8% 2.4% cash Oldtown Bhd 282 2.76 22.7x 19.2x 17.9x 3.2x 3.0x 17% 20.3% 15.4% 2.2% cash ABR Holdings Ltd 104 0.72 26.8x NaN NaN 1.5x 1.4x 5% 6.5% 5.2% 3.5% cash Old Chang Kee Ltd 74 0.86 20.9x 20.2x 19.3x 3.3x 1.4x 14% 8.3% 6.7% 3.5% cash Christine International Holdings Ltd 66 0.48 NULL NaN NaN 0.6x 0.4x NaN na na na NaN Neo Group Ltd 61 0.58 55.6x 29.0x 14.5x 2.9x 0.6x 20% 4.9% 4.8% 1.7% 1.97 Japan Foods Holding Ltd 54 0.44 16.6x NaN NaN 2.4x 1.2x 12% 6.5% 6.0% 4.6% cash Soup Restaurant Group Ltd 37 0.18 48.9x NaN NaN 5.6x 1.4x 11% 1.0% 2.6% 1.9% cash Katrina Group Ltd 37 0.23 10.7x 9.5x 8.1x 3.1x 0.8x 35% 9.5% 7.9% 6.3% cash Sakae Holdings Ltd 35 0.34 NULL NaN NaN 1.4x 0.6x -41% -10.7% -15.4% na 1.24 Tung Lok Restaurants (2000) Ltd 27 0.14 38.2x NaN NaN 2.4x 0.4x 4% 0.3% 0.7% na cash Pav illon Holdings Ltd 15 0.05 23.5x NaN NaN 0.5x 1.3x 2% 2.3% 5.7% na cash Regional average 29.4x 22.8x 19.7x 3.2x 1.4x 11% 6.7% 5.1% 2.7% 1.2x Source: Thomson Reuters, DBS Bank
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Company Guide
BreadTalk Group Ltd
Key Assumptions FY Dec 2013A 2014A 2015A 2016A 2017F 2018F
Bakery outlets 1,223 1,373 862 862 867 872
Restaurant outlets 41.0 34.0 30.0 32.0 34.0 36.0
Food court outlets 58.0 63.0 65.0 57.0 61.0 61.0 Total 1,322 1,470 957 951 962 969
Annual sales per outlet 0.64 0.65 0.65 0.65 0.67 0.69 S$m
Segmental Breakdown FY Dec 2013A 2014A 2015A 2016A 2017F 2018F
Revenues (S$m) Bakery operations 271 294 308 306 314 322 Includes S$9m investment Restaurant sales 122 131 143 150 163 176 income Food court income 143 165 173 159 167 175 Others 0.0 0.0 0.0 0.0 0.0 0.0
Total 537 590 624 615 643 673 Food court business to turnaround Operating profit (S$m) Bakery operations 11.1 7.23 5.15 12.6 14.1 14.5
Restaurant sales 9.02 12.7 25.8 23.2 25.2 27.3 Food court income 4.87 5.53 (2.9) (7.5) 2.50 2.63 Margins to expand through better cost Others (2.1) (0.6) (0.1) 6.99 0.0 0.0 management/efficiencies
Total 22.9 24.9 28.0 35.3 41.9 44.4
Operating profit (S$m)
Margins (%) Bakery operations 4.1 2.5 1.7 4.1 4.5 4.5 Higher staff costs and Restaurant sales 7.4 9.7 18.0 15.4 15.5 15.5 coming off a more robust Food court income 3.4 3.4 (1.7) (4.7) 1.5 1.5 SG50 year Others N/A N/A N/A N/A N/A N/A
Total 4.3 4.2 4.5 5.7 6.5 6.6
Source: Company, DBS Bank
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Company Guide BreadTalk Group Ltd
Income Statement (S$m) Margins Trend
FY Dec 2013A 2014A 2015A 2016A 2017F 2018F 7.0%
Revenue 537 590 624 615 643 673 6.0%
Cost of Goods Sold (252) (279) (294) (278) (283) (296) 5.0%
Gross Profit 285 311 330 337 360 377 4.0%
Other Opng (Exp)/Inc (262) (286) (298) (305) (318) (332) 3.0%
Operating Profit 22.9 24.9 32.6 32.5 41.9 44.4 2.0%
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 0.0 1.0% 2014A 2015A 2016A 2017F 2018F Associates & JV Inc 0.83 9.50 (1.3) (0.8) 0.87 0.92 Operating Margin % Net Income Margin % Net Interest (Exp)/Inc (1.4) (1.7) (1.3) (4.8) (4.8) (3.9) CHIJMES, Carl’s Jr China Exceptional Gain/(Loss) 0.0 0.0 (4.6) 2.80 9.30 0.0 and Jumbo. Expect less Pre-tax Profit 22.4 32.8 25.4 29.7 47.2 41.4 drag from Carl’s Jr. Tax (6.3) (6.8) (10.8) (12.1) (10.9) (9.5) Minority Interest (2.5) (3.9) (7.0) (6.2) (10.1) (8.8) Includes divestment gain of 111 Somerset. Preference Dividend 0.0 0.0 0.0 0.0 0.0 0.0 Net Profit 13.6 22.2 7.60 11.4 26.3 23.0 Net Profit before Except. 13.6 22.2 12.2 8.63 17.0 23.0 Includes divestment gain of 112 Katong and EBITDA 63.1 80.4 80.9 80.0 93.1 97.8 impairment of Foodcourt business in China. Growth Revenue Gth (%) 19.9 9.9 5.9 (1.5) 4.6 4.6 EBITDA Gth (%) 26.0 27.4 0.6 (1.1) 16.4 5.0 Includes S$3.2m write off Opg Profit Gth (%) 23.1 8.7 30.8 (0.2) 28.7 6.0 for store closures Net Profit Gth (Pre-ex) 13.3 63.0 (45.0) (29.2) 96.6 35.7 (%) Margins & Ratio Rationalisation of stores Gross Margins (%) 53.0 52.7 52.9 54.9 56.0 56.0 Opg Profit Margin (%) 4.3 4.2 5.2 5.3 6.5 6.6 Net Profit Margin (%) 2.5 3.8 1.2 1.9 4.1 3.4 Includes special dividend of ROAE (%) 15.4 20.2 6.0 8.8 18.6 14.5 1.35 Scts ROA (%) 3.3 4.4 1.4 2.1 4.8 4.0 ROCE (%) 6.9 6.2 5.2 5.4 9.1 9.1 No fixed dividend policy Div Payout Ratio (%) 37.2 19.1 55.6 94.7 26.8 30.5 Net Interest Cover (x) 16.9 14.9 24.7 6.8 8.7 11.3
Source: Company, DBS Bank
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Company Guide
BreadTalk Group Ltd
Quarterly / Interim Income Statement (S$m) Revenue Trend FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 4Q2016 164 12% 162 10% 160 8% Revenue 162 155 155 150 157 153 158 6% 156 Cost of Goods Sold (74.5) (72.3) (73.5) (67.4) (68.8) (67.8) 154 4%
152 2% Gross Profit 87.2 82.8 81.1 82.4 88.5 85.5 150 0% 148 -2% Other Oper. (Exp)/Inc (79.6) (68.5) (73.9) (75.7) (79.6) (75.8) 146 -4% Operating Profit 7.60 14.4 (1.0) 10.3 13.2 9.71 144 142 -6% Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 0.0 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 4Q2016
Associates & JV Inc (0.6) (0.7) (0.3) 0.0 0.56 (1.0) Revenue Revenue Growth % (QoQ) Net Interest (Exp)/Inc (1.3) 0.79 (1.1) (1.5) (1.2) (0.9) Exceptional Gain/(Loss) 0.0 (4.6) 8.19 (3.5) (4.3) 2.40 Pre-tax Profit 5.71 9.88 5.70 5.15 8.32 10.1 Includes write off of Foodcourt business totalling Tax (2.3) (5.6) (2.3) (2.2) (3.0) (4.7) S$5-6m from 1Q16 to 3Q16 Minority Interest (1.8) (3.1) (1.0) (1.7) (2.1) (1.4) Net Profit 1.57 1.15 2.45 1.31 3.26 4.02 Net profit bef Except. 1.57 5.74 (5.8) 4.85 7.50 1.63 Includes gain from sale of 112 EBITDA 18.8 25.9 11.4 21.9 25.9 20.4 Katong
Growth Revenue Gth (%) 4.4 (4.1) (0.3) (3.1) 5.1 (2.6) EBITDA Gth (%) 4.2 37.8 (55.8) 91.6 18.0 (21.2) Opg Profit Gth (%) 46.1 89.0 (107.2) (1,086.7) 28.4 (26.3) Net Profit Gth (Pre-ex) (45.7) 266.0 (200.2) (184.3) 54.8 (78.3) (%) Margins Gross Margins (%) 53.9 53.4 52.5 55.0 56.3 55.8 Opg Profit Margins (%) 4.7 9.3 (0.7) 6.9 8.4 6.3 Net Profit Margins (%) 1.0 0.7 1.6 0.9 2.1 2.6
Source: Company, DBS Bank
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Company Guide BreadTalk Group Ltd
Balance Sheet (S$m) Asset Breakdown FY Dec 2013A 2014A 2015A 2016A 2017F 2018F
Net Fixed Assets 226 221 206 181 171 159 Invts in Associates & JVs 8.21 34.0 33.9 35.3 36.1 37.1 Other LT Assets 85.8 115 126 105 105 104 Cash & ST Invts 79.4 95.5 102 138 164 202 Inventory 10.0 10.6 9.88 9.81 9.99 10.5 Debtors 49.2 54.5 60.0 59.2 62.4 65.3 Other Current Assets 9.81 8.19 7.28 6.46 6.46 6.46
Total Assets 468 539 545 534 555 584
ST Debt 30.3 76.3 82.0 31.5 31.5 31.5
Creditor 103 97.7 94.1 86.8 91.9 96.2
Other Current Liab 80.3 89.1 86.2 99.8 99.8 99.8 LT Debt 138 121 120 150 136 136 Other LT Liabilities 12.9 15.7 16.8 14.5 14.5 14.5 Shareholder’s Equity 94.0 125 129 132 151 167 S$75m bond issuance Minority Interests 10.0 13.2 17.2 19.9 30.0 38.8 4.9% coupon due 1
April 2019 Total Cap. & Liab. 468 539 545 534 555 584
Non-Cash Wkg. Capital (114) (113) (103) (111) (113) (114) Gearing resulted from financing for building
Net Cash/(Debt) (89.1) (102) (99.6) (43.5) (3.0) 34.4 IHQ Debtors Turn (avg days) 31.6 32.1 33.5 35.4 34.5 34.6 Creditors Turn (avg days) 166.1 156.8 143.3 144.1 140.1 140.9 Mainly from payment Inventory Turn (avg days) 16.7 16.2 15.3 15.7 15.5 15.3 lag by franchisees. Asset Turnover (x) 1.3 1.2 1.2 1.1 1.2 1.2 Otherwise a cash Current Ratio (x) 0.7 0.6 0.7 1.0 1.1 1.2 based business Quick Ratio (x) 0.6 0.6 0.6 0.9 1.0 1.2 Net Debt/Equity (X) 0.9 0.7 0.7 0.3 0.0 CASH Net Debt/Equity ex MI (X) 0.9 0.8 0.8 0.3 0.0 CASH Capex to Debt (%) 63.0 21.7 18.6 20.2 23.9 23.9
Source: Company, DBS Bank
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Company Guide
BreadTalk Group Ltd
Cash Flow Statement (S$m) Capital Expenditure 2013A FY Dec 2014A 2015A 2016A 2017F 2018F S$m 44.0 Pre-Tax Profit 22.4 32.8 25.4 29.7 47.2 41.4 43.0 42.0 Dep. & Amort. 39.3 45.9 49.6 48.3 50.4 52.5 41.0 40.0 Tax Paid (7.6) (6.9) (6.9) (9.1) (10.9) (9.5) 39.0 38.0 Assoc. & JV Inc/(loss) (0.8) (9.5) 1.31 0.83 (0.9) (0.9) 37.0 36.0 Chg in Wkg.Cap. 16.9 6.00 0.42 10.2 1.71 0.95 35.0 34.0 Other Operating CF 2.28 5.02 (3.4) 9.20 0.0 0.0 33.0 2014A 2015A 2016A 2017F 2018F Net Operating CF 72.5 73.3 66.5 89.2 87.6 84.4 Capital Expenditure (-) Capital Exp.(net) (106) (42.9) (37.5) (36.7) (40.0) (40.0) Other Invts.(net) (14.7) (22.1) (20.4) 16.3 0.0 0.0
Invts in Assoc. & JV (2.9) (5.0) (22.9) (2.8) 0.0 0.0 Div from Assoc & JV 0.0 0.75 1.19 0.46 0.0 0.0
Other Investing CF 1.34 (16.6) 21.7 (2.3) 0.0 0.0
Net Investing CF (122) (85.9) (57.9) (25.0) (40.0) (40.0) Capex to be similar to Div Paid (3.7) (5.1) (4.2) (8.0) (7.0) (7.0) FY16 Chg in Gross Debt 72.5 28.6 3.60 (20.6) (14.0) 0.0
Capital Issues 0.0 (0.6) (0.7) 0.0 0.0 0.0 Other Financing CF (3.7) (4.4) (8.7) (9.6) 0.0 0.0
Net Financing CF 65.1 18.5 (10.0) (38.2) (21.0) (7.0) Currency Adjustments 0.0 (1.0) 0.82 (0.4) 0.0 0.0 Chg in Cash 15.2 4.94 (0.6) 25.7 26.5 37.4 Opg CFPS (S cts) 19.8 23.9 23.5 28.1 30.5 29.7 Repaid S$14m debt for Free CFPS (S cts) (12.0) 10.8 10.3 18.7 16.9 15.8 111 Somerset investment Source: Company, DBS Bank
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Company Guide BreadTalk Group Ltd
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends
Completed Date: 4 Apr 2017 08:27:48 (SGT) Dissemination Date: 4 Apr 2017 08:55:07 (SGT)
GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report.
This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:
(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report.
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Company Guide
BreadTalk Group Ltd
DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making.
ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group.
COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates do not have a proprietary position in the securities recommended in this report as of 28 Feb 2017. 2. Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.
Compensation for investment banking services:
3. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.
Disclosure of previous investment recommendation produced:
4. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.
1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.
2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
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Company Guide BreadTalk Group Ltd
RESTRICTIONS ON DISTRIBUTION General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.
Australia This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), both of which are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.
Hong Kong This report has been prepared by a person(s) who is not licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities in Hong Kong pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong). This report is being distributed in Hong Kong and is attributable to DBS Vickers Hong Kong Limited, a licensed corporation licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong).
For any query regarding the materials herein, please contact Paul Yong (CE. No. ASE988) at [email protected].
Indonesia This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia.
Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.
Wong Ming Tek, Executive Director, ADBSR
Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.
Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only intended for institutional clients only and no other person may act upon it.
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Company Guide
BreadTalk Group Ltd
United This report is produced by DBS Bank Ltd which is regulated by the Monetary Authority of Singapore. Kingdom This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd, ("DBSVUK"). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom.
In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication.
Dubai This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.
United States This report was prepared by DBS Bank Ltd. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.
Other In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, jurisdictions professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.
DBS Bank Ltd 12 Marina Boulevard, Marina Bay Financial Centre Tower 3 Singapore 018982 Tel. 65-6878 8888 e-mail: [email protected] Company Regn. No. 196800306E
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