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 ASIAN INSIGHTS VICKERS SECURITIES ed: JS / JC, PY 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 ASIAN INSIGHTS VICKERS SECURITIES Page 2 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.