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Breadtalk Group Ltd Singapore Company Guide BreadTalk Group Ltd Version 9 | Bloomberg: BREAD SP | Reuters: BRET.SI Refer to important disclosures at the end of this report DBS Group Research . Equity 2 Aug 2019 HOLD Drag from bakery and start-up losses Last Traded Price ( 1 Aug 2019): S$0.715 (STI : 3,291.75) Price Target 12-mth: S$0.77 (8% upside) (Prev S$0.92) Maintain HOLD, with a lower TP of S$0.77. We remain neutral on BreadTalk. The weak bakery performance in China in the Analyst current quarter, along with wider than expected start-up losses Alfie YEO +65 6682 3717 [email protected] from 4orth division led us to reduce our FY19-20F earnings by Andy SIM, CFA +65 6682 3718 [email protected] 18-19%. While we expect modest EBIT growth led by What’s New Restaurant and Food Atrium divisions, higher interest costs due • 2Q19 earnings below estimates, dragged by losses in to SFRS (I) 16 will be a drag on earnings from FY19F. The stock bakery and 4orth division is fairly valued trading at 19.5x PE for its core F&B business, in line with Singapore-listed F&B peers’ average. • Interim DPS of 0.5 Scts declared • Cut FY19-20F earnings by 18-19% Where we differ. Our earnings forecasts are below consensus as we factor in a longer breakeven period for the new 4orth • Maintain HOLD, TP lowered to S$0.77 division. The division is in its infancy with scope to increase store count, that will lengthen the division’s EBIT breakeven period. This unit should be capable of delivering similar margins to the Price Relative restaurant division in the long term. Potential catalyst. We see potential for a special dividend of up to 4.5Scts if Perennial sells AXA Tower. Valuation: Our TP of S$0.77 is derived from a sum-of-parts (SOTP) valuation. We value its retail business at S$0.54 on 22x PE on Forecasts and Valuation blended FY19-20F earnings, investment properties at S$0.33 FY Dec (S$m) 2018A 2019F 2020F 2021F based on market value, and net debt at S$0.10. Revenue 610 660 698 738 EBITDA 79.7 83.0 89.3 95.9 Pre-tax Profit 31.1 21.7 23.6 27.9 Key Risks to Our View: Net Profit 15.2 13.2 14.4 17.0 Operational risks include food safety and licences as well as Net Pft (Pre Ex.) 16.4 13.4 14.4 17.0 negative publicity. In extreme cases, food operating licences Net Pft Gth (Pre-ex) (%) 22.1 (18.4) 7.6 18.0 EPS (S cts) 2.70 2.35 2.56 3.02 can be revoked for lapse in food safety procedures. Negative EPS Pre Ex. (S cts) 2.91 2.38 2.56 3.02 publicity may lead to weaker demand and poorer marketability EPS Gth Pre Ex (%) 22 (18) 8 18 when selling its franchises as the public and franchisees would Diluted EPS (S cts) 2.69 2.34 2.55 3.00 shy away from their association with BreadTalk. Net DPS (S cts) 1.50 1.50 1.50 1.50 BV Per Share (S cts) 23.7 24.6 25.6 27.1 At A Glance PE (X) 26.5 30.5 28.0 23.7 PE Pre Ex. (X) 24.6 30.1 28.0 23.7 Issued Capital (m shrs) 564 P/Cash Flow (X) 6.1 9.2 7.5 6.2 Mkt. Cap (S$m/US$m) 403 / 293 EV/EBITDA (X) 5.9 5.8 5.4 4.9 Major Shareholders (%) Net Div Yield (%) 2.1 2.1 2.1 2.1 Meng Tong Quek 34.0 P/Book Value (X) 3.0 2.9 2.8 2.6 Lih Leng Lee 18.6 Net Debt/Equity (X) 0.2 0.3 0.3 0.2 Free Float (%) 47.4 ROAE (%) 11.5 9.7 10.2 11.4 3m Avg. Daily Val (US$m) 0.17 Earnings Rev (%): (19) (18) N/A ICB Industry : Consumer Services / General Retailers Consensus EPS (S cts): 2.80 3.10 4.30 Other Broker Recs: B: 0 S: 0 H: 3 Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P ed: JS/ sa: MA, PY, CS Company Guide BreadTalk Group Ltd WHAT’S NEW Bakery division start-up losses a drag 2Q19 below: Headline net profit of S$1m (-57.9% y-o-y) Restaurant division grew strongly in 2Q19 to offset poor trailed our estimates. Revenue grew 9.8% y-o-y to S$163m 1Q19 performance: There was a sequential doubling of with operating profit declining by 10.3% y-o-y to S$10.2m. operating profit to S$8.3m in 2Q19 as 2 new Singapore Revenue growth was across all segments, particularly outlets (Jewel and Marina Bay Sands) were added. This is in Restaurant (+18% y-o-y, S$44m) and 4orth (+158%, S$7.8m) addition to Thailand’s Terminal 21 and Singapore’s Great divisions while Bakery (+3%, S$70.8m) and Food Atrium World City outlets which opened in 1Q19. However, 1H19’s (+2%, S$39.6m) grew by a smaller extent. The drag on net operating profit was flat compared to 1H18 with 1H19 profit profit was from losses before tax in the Bakery division (- before tax trailing 13% y-o-y at S$11.5m. A new outlet in S$1.9m vs S$1.5m profit before tax in 2Q18) and larger London has yet to turn profitable, while Singapore operations losses before tax of S$3.2m at the 4orth division vs S$0.2m are facing slight margin pressure, accounting for the overall loss in 2Q18. An interim dividend of 0.5 Scts was declared, drag in profit before tax in 1H19. unchanged from 2Q18, and in line with expectations. More outlets, wider losses at 4orth division: Losses widened Bakery division weak, dragged by China: The Bakery division to S$3.2m PBT from S$0.2m loss last year and S$2.3m loss in posted losses before tax of S$1.9m on the back of weaker 1Q19 due to an increase in number of outlets and start-up revenue (from a S$1.5m profit before tax in 2Q18), dragged costs. There are now 21 outlets, 7 new outlets from 1Q19 by China, offset by stronger performance in Singapore. and 13 new outlets since last year. Revenue growth of 3% y-o-y was only achieved through the Cut FY19-20F earnings by 18-19%: 1H19 earnings trailed our acquisition of 50% interest in BTM (Thailand) Ltd from Minor previous estimates following earnings drag from the bakery Food Group. There was a net store count increase of 33 to division and start-up losses from the 4orth division. The 875 stores partly due to the consolidation of Thailand’s 50 impact of higher interest rates from accounting of leases outlets. There was a decline in franchised stores in line with under SFRS (I) 16 has not helped reported earnings either. the rationalisation of franchisees. While headline revenue Going forward, we impute higher interest rates due to the increased, higher operating costs led to an operating loss of new lease accounting as well. S$0.8m compared to S$1.8m operating profit in 2Q18. Maintain HOLD, lower TP to S$0.77: Our SOTP TP is now Food Atrium continues to grow: Food Atrium division turned lower at S$0.77 based on S$0.54 for the core F&B business in a decent performance, with profit before tax growing by valued at 22x blended FY19-20F EPS, investment properties at 13% y-o-y to S$4.2m. Three new “Sergeant kitchens” in S$0.33 based on market value, and net debt at S$0.10. The Bangkok, Hong Kong and Shanghai and strong same store stock is now valued fairly at 19.5x for its core F&B business, in sales growth (SSSG) in North China, East China and Hong line with Singapore-listed F&B peer average. Upside for the Kong helped to fuel revenue growth. Stall occupancy also stock remains limited. Maintain HOLD. remained high. Page 2 Company Guide BreadTalk Group Ltd Quarterly / Interim Income Statement (S$m) FY Dec 2Q2018 1Q2019 2Q2019 % chg yoy % chg qoq Revenue 149 158 163 9.8 3.6 Cost of Goods Sold (65.6) (51.1) (54.3) (17.2) 6.2 Gross Profit 83.2 106 109 31.0 2.4 Other Oper. (Exp)/Inc (71.8) (97.2) (98.8) 37.6 1.6 Operating Profit 11.4 9.22 10.2 (10.3) 10.8 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 - - Associates & JV Inc (0.5) 0.0 (0.1) 80.0 nm Net Interest (Exp)/Inc (1.2) (5.4) (5.1) (310.5) 5.1 Exceptional Gain/(Loss) (2.6) (0.2) 0.0 nm nm Pre-tax Profit 7.03 3.65 5.01 (28.7) 37.1 Tax (2.6) (2.5) (2.9) 11.8 19.4 Minority Interest (2.0) 0.12 (1.1) 46.5 nm Net Profit 2.44 1.32 1.02 (57.9) (22.2) Net profit bef Except. 5.02 1.48 1.02 (79.6) (30.6) EBITDA 20.1 47.4 49.6 146.4 4.5 Margins (%) Gross Margins 55.9 67.5 66.7 Opg Profit Margins 7.7 5.8 6.3 Net Profit Margins 1.6 0.8 0.6 Source of all data: Company, DBS Bank Page 3 Company Guide BreadTalk Group Ltd Bakery outlets 885 CRITICAL DATA POINTS TO WATCH 893.9 871 863 875 880 766.2 Critical Factors 638.5 510.8 Focus on driving higher operating efficiencies and margin 383.1 improvement.
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