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Breadtalk (BREAD Results Review Singapore 5 August 2019 Consumer Non-cyclical | Food & Beverage Products BreadTalk (BREAD SP) Neutral (Maintained) A Stale Bread; Try Again Later Target Price (Return) SGD0.71 (+3%) Price: SGD0.69 Market Cap: USD277m Avg Daily Turnover (SGD/USD) 0.4m/0.3m Maintain NEUTRAL with lower SOP-based TP of SGD0.71 from SGD0.81, Analyst implying 3% upside with 2% yield. 2Q19 results were below expectations. 2Q19 PATMI was down 58% YoY to SGD1.0m, dragged by weak bakery Juliana Cai operations and start-up costs at the 4orth division. As a result, we cut our +65 6232 3871 FY19F-21F earnings by 14%/12%/7%, and derive a lower TP of SGD0.71. [email protected] Short-term catalyst is the sale of its stake in AXA tower. Bakery segment swung into the red in 2Q19. The bakery division incurred losses of SGD1.9m in 2Q19, down SGD3.4m YoY. This was largely attributed to the consolidation of the loss-making Thailand bakery business following the acquisition of a 50% interest in BTM (Thailand) from Minor Group. In addition, the China operations remained weak. The rationalisation of China franchisees Share Performance (%) over the last 12 months has reduced franchise earnings. YTD 1m 3m 6m 12m Losses from the 4orth division widened QoQ and YoY, due to new store Absolute (15.85) (5.48) (18.82) (20.23) (36.11) openings. Currently, the division has five brands – So Ramen, Song Fa, Tai Relative (22.12) (2.34) (14.96) (22.63) (35.97) Gai, Nayuki and Wu Pao Chun, with So Ramen being the only profitable brand thus far. The number of stores under the 4orth division rose to 21 in 2Q19 from eight in 2Q18. During the results briefing on 2 Aug, management guided that there would be no addition of new brands to the 4orth division for the time being. Instead, it would focus on growing Song Fa outlets in Thailand and four major cities in China where it has the master-franchise rights – we view this positively. Based on management’s previous guidance, Song Fa outlets have a fast breakeven period of about two months. We believe the division would breakeven in 2020 when the number of Song Fa stores reaches critical mass. Food Atrium continues to hold its weight, delivering higher margins in 2Q19 as its pre-tax profit grew 14% YoY to SGD4.2m. However, with pre-tax margins at 10.6%, we think margins have more or less peaked for this segment. Further earnings growth would be dependent on new store openings. Source: Bloomberg Restaurant pre-tax earnings showed YoY and QoQ improvements. This was largely driven by three new Din Tai Fung restaurants in Singapore and one in Thailand that have opened YTD; Din Tai Fung UK is still loss-making. Need a few more quarters to revive the stale bread. Despite a disappointing set of result, we maintain our NEUTRAL call as we see potential for earnings to recover next year, led by the expected turnaround at its 4orth division and contributions from new Din Tai Fung restaurants. Forecasts and Valuation Dec-17 Dec-18 Dec-19F Dec-20F Dec-21F Total turnover (SGDm) 600 610 705 748 787 Recurring net profit (SGDm) 12.6 12.7 12.4 14.3 17.5 Recurring net profit growth (%) 81.7 0.8 (2.6) 16.0 21.8 Recurring P/E (x) 31.7 31.5 32.3 27.9 22.9 P/BV (x) 1.5 3.0 2.9 2.8 2.7 P/CF (x) 2.4 6.1 10.6 5.0 4.4 Dividend Yield (%) 9.9 2.1 2.1 2.3 3.1 EV/EBITDA (x) 5.5 6.6 5.9 5.6 4.7 ROE (%) 16.2 11.4 9.0 10.1 11.8 Net debt to equity (%) 30.7 30.6 69.4 64.9 55.1 Interest coverage (x) 13.8 6.4 6.8 6.8 8.4 Source: Company data, RHB See important disclosures at the end of this report 1 BreadTalk Singapore Results Review 5 August 2019 Consumer Non-cyclical | Food & Beverage Products Financial Exhibits Asia Financial summary Dec-17 Dec-18 Dec-19F Dec-20F Dec-21F Singapore Recurring EPS (SGD) 0.03 0.02 0.02 0.03 0.03 Food & Beverage Products DPS (SGD) 0.07 0.02 0.02 0.02 0.02 BreadTalk BVPS (SGD) 0.48 0.24 0.24 0.25 0.26 Bread SP ROE (%) 16.18 11.37 8.99 10.06 11.82 NEUTRAL Valuation metrics Dec-17 Dec-18 Dec-19F Dec-20F Dec-21F Valuation basis Recurring P/E (x) 31.7 31.5 32.3 27.9 22.9 SOP Valuation P/B (x) 1.5 3.0 2.9 2.8 2.7 FCF Yield (%) 12.7 4.5 -9.3 4.8 7.6 Key drivers Dividend yield (%) 9.9 2.1 2.1 2.3 3.1 i. New stores openings EV/EBITDA (x) 5.5 6.6 5.9 5.6 4.7 ii. Same-store-sales growth EV/EBIT (x) 10.6 12.1 12.5 11.6 9.3 iii. Cost control Income statement (SGDm) Dec-17 Dec-18 Dec-19F Dec-20F Dec-21F Key risks Total turnover 600 610 705 748 787 i. Food safety and reputation risks Gross profit 333 343 458 494 527 ii. Slowdown in economy EBITDA (adj.) 84 80 89 97 112 iii. Intensifying competition Depreciation & amortisation 40 41 47 51 56 Operating profit 44 39 42 45 56 Net interest -3 -6 -6 -7 -7 Company Profile Pre-tax profit 41 31 22 26 35 BreadTalk is a multi-brand owner and operator Taxation -11 -11 -8 -9 -12 in the food & beverage space. Its business units Net profit 30 20 14 17 22 are organised in three main segments namely bakery, restaurants and food atrium. Some of its Recurring net profit 13 13 12 14 17 prominent brands include BreadTalk, Din Tai Fung and Food Republic. Cash flow (SGDm) Dec-17 Dec-18 Dec-19F Dec-20F Dec-21F Change in working capital 15 -7 -29 5 6 Cash flow from operations 84 66 38 79 90 Capex -34 -48 -75 -60 -60 Cash flow from investing activities -38 -52 -72 -60 -60 Dividends paid -17 -11 -8 -9 -12 Cash flow from financing activities -24 30 -78 -17 -20 Cash at beginning of period 121 141 185 65 67 Net change in cash 22 44 -113 3 11 Ending balance cash 141 185 65 67 79 Balance sheet (SGDm) Dec-17 Dec-18 Dec-19F Dec-20F Dec-21F Total cash and equivalents 141 185 65 67 79 Tangible fixed assets 169 173 210 219 224 Total investments 37 35 36 37 38 Total assets 557 608 540 554 568 Short-term debt 57 98 30 30 30 Total long-term debt 126 128 130 130 130 Total liabilities 397 446 372 378 382 Total equity 160 163 168 176 186 Total liabilities & equity 557 608 540 554 568 Key metrics Dec-17 Dec-18 Dec-19F Dec-20F Dec-21F Revenue growth (%) (2.5) 1.7 15.6 6.1 5.2 Recurrent EPS growth (%) 156.5 (28.2) (2.6) 16.0 21.8 Gross margin (%) 55.6 56.3 65.0 66.0 67.0 Operating EBITDA margin (%) 12.4 13.2 12.6 12.9 14.2 Net profit margin (%) 2.1 2.1 1.8 1.9 2.2 Capex/sales (%) 5.6 7.8 10.6 8.0 7.6 Interest cover (x) 13.8 6.4 6.8 6.8 8.4 Source: Company data, RHB See important disclosures at the end of this report 2 BreadTalk Singapore Results Review 5 August 2019 Consumer Non-cyclical | Retailing Figure 1: 2Q19 result summary FYE Dec (SGDm) 2Q19 1Q19 2Q18 QoQ (%) YoY (%) Comments Sales growth was largely driven by new outlet openings in the Restaurant Revenue 163.3 157.6 148.8 3.6 9.8 and 4orth divisions, as well as consolidation of revenue from its Thailand bakeries. EBIT 12.0 9.1 8.8 32.5 36.2 Increase was largely due to adoption of SFRS(I)16. EBIT Margin (%) 7.3 5.7 5.9 Pretax Profit 5.0 3.7 7.0 37.1 (28.7) Weaker pretax profit YoY due to losses from Bakery and 4orth divisions. Pretax Margin (%) PATMI 1.0 1.3 2.4 (23.1) (58.9) Net Margin (%) 0.6 0.8 1.6 Source: Bloomberg, RHB Figure 2: TP derivation (SGD m) FY19F FY20F FY21F FY22F FY23F Net Income 12.4 14.3 17.5 19.2 21.1 + Non-Cash Charges 46.6 51.2 55.9 60.5 60.0 + Fixed Capital Investment (75.0) (60.0) (60.0) (60.0) (60.0) + Change in net working capital (29.2) 4.6 5.9 4.5 4.5 + Change in debt (65.9) 0.0 0.0 0.0 0.0 FCFE (111.1) 10.2 19.2 24.1 25.6 Terminal Value 504.4 PV -111.1 9.5 16.6 19.3 393.9 Total discounted FCFE 328.2 Value/Share (SGD) 0.58 (A) Cost of equity 7.7% Risk free rate 2.5% Beta 0.8 Market return 9.0% Terminal growth 2.5% Investment Properties Book Value 72.1 Value/Share (SGD) 0.13 (B) RHB TP (A+B) 0.71 Source: Bloomberg, RHB See important disclosures at the end of this report 3 RHB Guide to Investment Ratings results, performance or achievement to be materially different from any future results, performance or achievement, expressed or implied by such forward-looking statements.
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