Breadtalk Group

Consumer Staples / Singapore BREAD SP Consumer Staples / Singapore 9 September 2015 BreadTalk Group BreadTalk Group Target (SGD): 1.31 Upside: 16.4% BREAD SP 8 Sep price (SGD): 1.13 Initiation: comfort food 1 Buy (initiation) • A bakery, restaurant and food-court company whose share price 2 Outperform has underperformed peers on the back of negative news flow 3 Hold • This seems unjustifiable given its revenue growth for 2015-17E, 4 Underperform and as we expect further upside from outlet and margin expansion 5 Sell • Initiate coverage with Buy(1) rating and 12-month TP of SGD1.31; we see a net-profit CAGR of 26.3% over 2014-17E How do we justify our view? Accordingly, we initiate coverage on SGD1.31, based on 2016E PER of BreadTalk with a Buy (1) rating, and 19.6x, which is the stock’s past-5- forecast a 26.3% net-profit CAGR year mean. over 2014-17, on the back of a 9.6% revenue CAGR and 3pp EBITDA ■ Risks Shane Goh margin expansion. The key risks to our call would be: 1) (65) 6499 6546 more food scandals, and 2) if the [email protected] ■ Catalysts company were unable to find good Bakeries: we expect 189 new locations for new outlets. outlets (20% rise from 30 June ■ Investment case 2015) to open by the end of 2017E, BreadTalk’s share price has with 150 franchised bakery stores. Share price performance underperformed the FSSTI and the We view this positively as franchised (SGD) (%) average of its local consumer peers outlets allow BreadTalk to expand 1.60 115 by 16% and 24% YTD, respectively, store count without much risk (low 1.48 108 on the back of a slew of negative capital outlay). 1.35 100 1.23 93 press in 2015, notably regarding the 1.10 85 soy-milk scandal in Singapore. We Food courts: the company aims to Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 think management has responded have 80 food courts by 2017, up BreadTalk (LHS) Relative to FSSTI (RHS) well to the situation by offering to from 62 as at 30 June 2015. We view take remedial action. And more this as a positive given the relatively importantly, we have not seen any 12-month range 1.11-1.58 stable revenue per food court. Market cap (USDbn) 0.22 significant impact on underlying 3m avg daily turnover (USDm) 0.18 consumer demand arising from the Restaurants: we expect the overall Shares outstanding (m) 282 news. As such, we believe the stock EBITDA margin expansion to come Major shareholder George Quek (52.6%) should be rerated, once the from the company either closing its headlines have moved on, and this non-performing RamenPlay Financial summary (SGD) should happen in the next 6 months. Year to 31 Dec 15E 16E 17E restaurants and giving up the lease Revenue (m) 637 703 776 or closing them and converting the Operating profit (m) 28 41 52 We are positive on BreadTalk’s space to house its better-performing Net profit (m) 12 19 25 outlook, driven by potential new brands, Din Tai Fung and Sanpoutei, Core EPS (fully-diluted) 0.044 0.067 0.087 store openings for its 3 business EPS change (%) 1.1 53.2 30.1 which lead to higher SSSG (11.7% Daiwa vs Cons. EPS (%) (7.2) 6.9 8.7 segments (bakeries, restaurants and over 2014-17E) for the restaurant PER (x) 25.8 16.8 12.9 food courts) and EBITDA margin business. Dividend yield (%) 1.3 1.3 1.3 expansion, due it culling its DPS 0.015 0.015 0.015 underperforming RamenPlay PBR (x) 2.9 2.5 2.2 ■ Valuation EV/EBITDA (x) 5.4 4.2 3.4 restaurants. We initiate coverage with a Buy (1) ROE (%) 11.6 16.0 18.1 rating and 12-month target price of Source: FactSet, Daiwa forecasts See important disclosures, including any required research certifications, beginning on page 28 Consumer Staples / Singapore BREAD SP 9 September 2015 Contents Comfort food ................................................................................................................................... 6 Company background ................................................................................................................. 6 Share price underperformance ................................................................................................... 6 Negative press: a year best forgotten so far ................................................................................. 7 Revenue growth driven by new stores and favourable macro trends ........................................ 8 Doing more with less .................................................................................................................. 11 Opening doors for other brands ................................................................................................ 13 Forging relationships via its property investments ................................................................... 14 Competition in China ................................................................................................................. 14 Financial position ....................................................................................................................... 15 Assumptions ............................................................................................................................... 15 Valuation .................................................................................................................................... 17 SWOT analysis ........................................................................................................................... 17 Risks to our call .......................................................................................................................... 19 Company background ................................................................................................................ 19 Bakery business .......................................................................................................................... 21 Restaurants ............................................................................................................................... 23 Food-court business .................................................................................................................. 24 Management ............................................................................................................................. 25 Shareholding structure ............................................................................................................. 25 - 2 - Consumer Staples / Singapore BREAD SP 9 September 2015 1 Buy (initiation) How do we justify our view? 2 Outperform 3 Hold Growth outlook 4 Underperform Valuation 5 Sell Earnings revisions BreadTalk: number of outlets Growth outlook 1,200 We forecast revenue CAGR of 9.6% over 2014-17, driven 80 by new store openings. We expect 189 new outlets (20% 73 1,000 67 44 rise from 30 June 2015), largely due to the bakery and 63 40 58 36 food-court segments. 800 34 47 41 697 600 37 30 652 We also forecast a 3pp expansion in the EBITDA 547 602 32 26 479 margin, to 15% by 2017, on the back of higher SSS for 400 33 21 384 290 BreadTalk’s restaurant segment, as it continues to 8 238 rationalise its underperforming RamenPlay outlets. 200 182 225 258 270 280 290 299 119 157 181 0 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E Direct-owned bakeries Franchise bakeries Restaurant Food Atrium Source: Company, Daiwa forecasts Valuation BreadTalk: earnings per share (SGD cents) We initiate coverage with a Buy (1) rating and 12-month 10 8.72 target price of SGD1.31, implying 16.4% upside potential 9 from current share price levels. Our target price is based 8 6.70 on a 2016E PER of 19.6x, which is the same as 7 6 BreadTalk’s past 5-year mean. 4.83 5 4.27 4.33 4.44 3.95 4.01 4.12 Our target price is 15.5% below that of the Bloomberg 4 consensus, which we think is due to the other 2 3 brokerage houses covering the stock assigning more 2 aggressive valuation multiples. 1 0 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E Source: Company, Daiwa forecasts BreadTalk: share price and Bloomberg consensus EPS Earnings revisions forecasts (SGD) The Bloomberg consensus has lowered its 2015-16 EPS 1.8 0.10 forecasts for BreadTalk by 30.9% and 29.2% YTD, 0.09 1.6 respectively. We think this could be one factor 0.08 contributing to BreadTalk’s share price decline this year. 0.07 1.4 Our 2015 EPS is 7.2% below consensus, which we think 0.06 1.2 is due to its lower revenue projections vs. those of its 0.05 0.04 peers. However, our 2016 EPS is ahead by 6.9%, as we 1.0 expect stronger EBITDA margin expansion, driven by it 0.03 rationalising its underperforming restaurants. 0.8 0.02 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Price EPS Adjustments 2015 EPS Adjustments 2016 Source: Bloomberg - 3 - Consumer Staples / Singapore BREAD SP 9 September 2015 Financial summary Key assumptions Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Total number of outlets 448 534 686 836 914 985 1,055 1,120 Sales per outlet (SGD '000) 00000000 - Direct-owned bakery 993 1,002 984 953 956 985 1,005 1,015 - Franchised bakery 101 95 99 96 81 83 84 85 - Restaurant 3,880 3,275 3,665 3,442 3,486 3,939 4,412 4,853 - Food atrium 2,723 2,739 2,657 2,724 2,725 2,780 2,808 2,836 Profit and loss (SGDm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Sales div 1 00000000 Sales div 2 00000000 Other Revenue 303 366 447 537 590 637 703 776 Total Revenue 303 366 447 537 590 637 703 776 Other income 147101218151617 COGS (138) (166) (206) (252) (279) (295) (322) (355) SG&A (141) (166) (202) (234) (258) (276) (297) (322) Other op.expenses (22) (24) (31) (39) (46)

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