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Breadtalk (BREAD SP) Neutral (Maintained) Singapore Company Update 26 February 2020 Consumer Non-cyclical | Food & Beverage Products BreadTalk (BREAD SP) Neutral (Maintained) Time To Cash Out And Accept Offer Target Price (Return): SGD0.77 (+19%) Price: SGD0.65 Market Cap: USD260m Avg Daily Turnover (SGD/USD) 0.82m/0.60m Accept SGD0.77 cash offer, 19% upside. A conditional cash offer of Analyst SGD0.77/share was made by George Quek, Katherine Lee and Minor Group to delist BreadTalk. Shareholders should accept it, as the offer Juliana Cai price is 15% above our previous TP of SGD0.67. Moreover, BreadTalk is +65 6232 3871 undergoing major challenges across key markets, and reported losses for [email protected] FY19. A quick turnaround is unlikely, with the COVID-19 outbreak further exacerbating the situation. The offer presents a good opportunity for shareholders to realise their investments. 4Q19 results are below expectations. The group’s 4Q19 loss of SGD8.1m took the FY19 total to a loss of SGD5.2m. Excluding fair value gains, FY19 core F&B losses widened to SGD11.7m. This was mainly Share Performance (%) attributed to losses across China, Hong Kong, Indonesia and Thailand in YTD 1m 3m 6m 12m the bakery division, and gestation costs for new store openings in the Absolute 0.0 2.4 2.4 (9.2) (25.9) 4orth division. The group also recorded SGD6.1m of impairments due to the closure of bakery outlets. Relative 2.0 5.1 3.5 (10.3) (22.2) 52-wk Price low/high (SGD) 0.53 – 0.89 Near-term challenges to intensify due to COVID-19 outbreak. BreadTalk’s food and beverage (F&B) retail business is highly exposed to Breadtalk (BREAD SP) markets that are disrupted by the virus epidemic. As at FY19, 56% of Price Close Relative to Straits Times Index (RHS) revenue is derived from Singapore, while 31% is from Greater China 1.00 108 (Mainland China and Hong Kong). We expect Singapore sales to dip c.3- 0.90 100 5% YoY while sales from Greater China could fall >10% YoY this year. This would have a negative impact on operating leverage. There may also 0.80 91 be more store closures in FY20 in the bakery division, and a slower 0.70 83 turnaround from the 4orth division. 0.60 75 Offer is fair. The offer price represents premiums of c.30%, 24% and 25% 0.50 66 over the volume-weighted average price (VWAP) per share for the 1- month, 3-month and 6-month periods respectively, up to and including 21 0.40 58 Jul-19 Jul-19 Apr-19 Oct-19 Oct-19 Jun-19 Jun-19 Jan-20 Jan-20 Mar-19 Mar-19 Feb-19 Feb-20 Sep-19 Nov-19 Dec-19 Aug-19 Aug-19 Nov-19 Dec-19 May-19 Feb. The offer price also implies 34x FY18 P/E and 2.9x FY20F P/BV. May-19 After excluding the fair value of the investment properties and investment Source: Bloomberg securities (SGD245m), the offer price still implies a decent 15x P/E, based on FY18 core F&B PATMI of SGD12.7m (FY19 recorded a loss while we estimate FY20 earnings to remain sub-par due to the COVID-19 outbreak). This is in line with the Singapore-listed food service retailers’ average, despite its weaker outlook. Time to cash out. The near-term outlook is very challenging. Although George Quek previously publicised his targets to grow the group’s market cap to >SGD1bn and raise its net margin to 8% by FY22, we think they would require a much longer timeframe to realise – given the current difficult operating environment and losses across key markets of the bakery division. We recommend that shareholders exit their investment with this offer. Forecasts and Valuation Dec-18 Dec-19 Dec-20F Dec-21F Dec-22F Total turnover (SGDm) 610 665 663 712 757 Recurring net profit (SGDm) 13 (12) 2 11 16 Recurring net profit growth (%) 0.8 (192.1) - 336.9 51.0 Recurring P/E (x) 28.61 na 146.58 33.54 22.21 P/B (x) 2.7 2.5 2.4 2.4 2.3 P/CF (x) 6.31 1.12 7.18 5.49 4.74 Dividend Yield (%) 2.3 2.3 na 1.9 2.8 EV/EBITDA (x) 4.47 9.47 8.37 6.36 5.41 Return on average equity (%) 11.3 (3.7) 1.7 7.1 10.4 InterestNet debt cover to equity (x) (%) 4.24 25.2 103.5 1.70 1.32 99.4 2.95 92.1 3.92 85.5 Source: Company data, RHB See important disclosures at the end of this report 1 BreadTalk Singapore Company Update 26 February 2020 Consumer Non-cyclical | Food & Beverage Products Financial Exhibits Asia Financial summary (SGD) Dec-18 Dec-19 Dec-20F Dec-21F Dec-22F Regional Recurring EPS 0.02 (0.02) 0.00 0.02 0.03 Consumer Non-cyclical DPS 0.02 0.02 - 0.01 0.02 BreadTalk BVPS 0.24 0.26 0.27 0.27 0.28 BREAD SP Return on average equity (%) 11.3 (3.7) 1.7 7.1 10.4 Neutral Valuation metrics Dec-18 Dec-19 Dec-20F Dec-21F Dec-22F Valuation basis Recurring P/E (x) 28.61 na 146.58 33.54 22.21 SOP P/B (x) 2.7 2.5 2.4 2.4 2.3 FCF Yield (%) 2.7 76.4 1.5 4.5 4.6 Key drivers Dividend Yield (%) 2.3 2.3 - 1.9 2.8 i. Divestment of real estate investment; EV/EBITDA (x) 4.47 9.47 8.37 6.36 5.41 ii. Margin improvements; EV/EBIT (x) 9.20 34.75 44.60 19.65 14.68 iii. Potential privatisation target. Income statement (SGDm) Dec-18 Dec-19 Dec-20F Dec-21F Dec-22F Key risks Total turnover 610 665 663 712 757 Gross profit 343 370 368 395 420 i. Slowdown in consumer consumption; ii. Higher-than-expected start-up losses from Din EBITDA 80 55 61 79 92 Tai Fung in UK and Song Fa in China and Depreciation and amortisation (41) (40) (50) (54) (58) Thailand. Operating profit 39 15 11 26 34 Net interest (6) (7) (7) (7) (6) Pre-tax profit 31 7 5 19 28 Company Profile Taxation (11) (11) (2) (7) (10) BreadTalk Group operates bakery, food, and restaurant businesses in Asia and the Middle East. It Reported net profit 15 (5) 2 11 16 operates through three segments: bakery, food court, Recurring net profit 13 (12) 2 11 16 and restaurant. Cash flow (SGDm) Dec-18 Dec-19 Dec-20F Dec-21F Dec-22F Change in working capital (9) 130 (2) 1 1 Cash flow from operations 58 324 51 66 77 Capex (48) (47) (45) (50) (60) Cash flow from investing activities (55) (153) (46) (51) (61) Dividends paid (11) (11) 0 (7) (10) Cash flow from financing activities 39 (38) 0 (7) (10) Cash at beginning of period 141 185 158 162 171 Net change in cash 42 134 5 8 6 Ending balance cash 183 319 162 171 176 Balance sheet (SGDm) Dec-18 Dec-19 Dec-20F Dec-21F Dec-22F Total cash and equivalents 185 158 162 171 176 Tangible fixed assets 173 712 708 705 707 Total investments 75 71 72 74 75 Total assets 608 1,257 1,259 1,272 1,288 Short-term debt 98 347 0 0 0 Total long-term debt 128 0 347 347 347 Total liabilities 446 1,074 1,073 1,081 1,088 Total equity 163 183 186 192 200 Total liabilities & equity 608 1,257 1,259 1,272 1,288 Key metrics Dec-18 Dec-19 Dec-20F Dec-21F Dec-22F Revenue growth (%) 1.7 9.0 (0.3) 7.4 6.3 Recurrent EPS growth (%) (49.6) (192.1) 0.0 337.1 51.0 Gross margin (%) 56.3 55.6 55.5 55.5 55.5 Operating EBITDA margin (%) 13.2 8.2 9.2 11.1 12.2 Net profit margin (%) 2.5 (0.8) 0.4 1.5 2.2 Dividend payout ratio (%) 55.6 (106.8) 0.0 62.6 61.7 Capex/sales (%) 7.8 7.0 6.8 7.0 7.9 Interest cover (x) 4.24 1.70 1.32 2.95 3.92 Source: Company data, RHB See important disclosures at the end of this report 2 BreadTalk Singapore Company Update 26 February 2020 Consumer Non-cyclical | Food & Beverage Products Recommendation Chart Date Recommendation Target Price Price Price Close 2019-09-04 Neutral 0.67 0.65 1.3 Recommendations & Target Price 2019-09-02 Neutral 0.71 0.67 na 0.71 0.81 0.75 0.75 1.2 1.00 2019-08-05 Neutral 0.71 0.69 1.1 2019-05-08 Neutral 0.81 0.82 0.67 1.0 2019-02-21 Neutral 0.81 0.87 0.9 2018-11-07 Sell 0.75 0.91 0.8 Source: RHB, Bloomberg 0.7 0.6 0.5 0.4 Buy Neutral Sell Trading Buy Take Profit Not Rated Feb-15 Jun-16 Sep-17 Dec-18 Source: RHB, Bloomberg See important disclosures at the end of this report 3 assumptions made and information currently available to RHB and are subject to RHB Guide to Investment Ratings known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievement to be materially different from any future Buy: Share price may exceed 10% over the next 12 months results, performance or achievement, expressed or implied by such forward-looking Trading Buy: Share price may exceed 15% over the next 3 months, however statements.
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