BreadTalk Group - Poised For Earnings Recovery
- After spending the past three years weeding out underperforming stores at each of its business divisions – from restaurants to bakeries to food atriums – we believe BreadTalk is poised for an earnings recovery in 2017.
- Furthermore, it is sparing no effort in optimising efficiencies this year, as it continues its group restructuring exercise to improve administrative productivity.
- We reiterate our BUY call on BreadTalk with unchanged TP of SGD1.45 (25% upside), based on FY17F EV/EBITDA of 5x.
Group restructuring exercise.
- After three years of housekeeping in each of its business divisions, BreadTalk Group (BreadTalk) is still sparing no effort in tightening costs.
- On 30 Dec 2016, BreadTalk announced the transfer of its Taster Food subsidiary (Din Tai Fung restaurants) to another wholly-owned subsidiary, Together Inc. (a holding company). This mini-restructuring exercise is expected to improve administrative and tax efficiencies and we expect more of such small-scale restructuring efforts in 2017.
Turnaround in operating divisions.
- We believe the Food Atrium segment is poised to turnaround in 2017, after the major streamlining exercise in 2016. Operating losses from the segment have reduced to SGD1.9m in 3Q16 from SGD5.7m in 4Q15.
- In addition, BreadTalk has been working on improving its supply chain efficiencies in the Bakery division. New products have also been introduced to Toast Box cafes and BreadTalk bakeries to enhance gross margins and boost ticket sales per head.
- We believe these initiatives should continue to prop up operating margins in 2017.
- The Restaurant segment is the most profitable for the group. We believe further expansion of the Din Tai Fung chain in Thailand where the group has existing operations and good track record would be rewarding.
- In addition, BreadTalk has a strong network of franchisees for its Bakery division. We see further growth opportunities if BreadTalk is able to sell more of its value-added products via its chain of franchisees.
Reiterate BUY call with unchanged TP of SGD1.45.
- We used a forward FY17F EV/EBITDA of 5x to derive our TP of SGD1.45, which also implies FY17F P/E of 16.5x. The stock is currently trading at FY17F EV/EBITDA of 4x, which we believe is undeserved when compared to regional small-cap food and beverage peers’ average EV/EBITDA of about 7x.
- Key risks to our earnings include potential high capex requirements to open new Din Tai Fung outlets in the UK region. Failure to attract the UK crowd could also result in long gestation periods and a slow payback period, in our view.
- Further slowdown in China’s economy may lead to even lower footfall in malls and, hence, affect business at BreadTalk’s bakeries and food atriums.