BreadTalk Group - OCBC Investment 2017-02-24: Entering a steadier state

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BREADTALK GROUP LIMITED 5DA.SI

BreadTalk Group - Entering a steadier state

• Food Atrium recovered.
• Bakery to focus on franchise business.
• Restaurant largely stable.

Higher other income for 4Q16 

• BreadTalk Group’s FY16 revenue was down 1.5% to S$615m, while PATMI was 50% higher to S$11.4m, helped by other income of S$33.8m (vs. S$16.3m in FY15). 
• Recall that in 1Q16, the group recorded a one-off divestment gain of ~S$8.5m before transaction cost from the sale of 112 Katong. 
• In 4Q16, other income was also higher at S$9.0m (vs. S$2.0m in 4Q15), attributable to its Food Atrium segment.

Food Atrium showed recovery in 4Q 

• Recall that earlier in the year, the group’s Food Atrium segment had been in losses since FY15 and recognized higher write-offs from outlet closures, against a tough operating environment in Mainland China. 
• Notably, with the group’s efforts towards cost management and consolidation of underperforming assets, 
• Food Atrium displayed a good recovery, as 4Q16 EBITDA grew 131% to S$6.8m, and margin was up from 6.8% to 17.7%. 
• While the outlook for Food Atrium is clearly better, a few new outlets will be opened this year, particularly in areas that the group has a strong track record in (e.g. Tier 1 cities in China), thus incurring some gestation costs.

Bakery and Restaurant earnings largely stable 

• On the other hand, both Bakery and Restaurant’s 4Q16 EBITDA dropped 8% and 38% respectively to S$5.8m and S$8.6m as the former made some provisions and the latter segment had a high base from SG50 last year coupled with higher staff costs, nonetheless, we expect earnings from both segments to remain largely steady ahead. 
• An on-going review on the Bakery’s franchisees and growth plan via franchisees bodes well for the segment’s earnings quality in the longer term, in our view.

Steadier earnings outlook 

• We place a higher PE peg of 24x (from 23x) on core FY17F earnings (excluding one-off gain of S$9.3m before transaction costs from the disposal of investment in TripleOne Somerset), in view of a generally steadier state of earnings outlook across segments. Thus our fair value is raised to S$1.21 (Previous FV: S$1.07). 
• We also take into account the possibility of special dividends from the divestment gain. 
• Maintain HOLD.

Jodie Foo OCBC Investment | http://www.ocbcresearch.com/ 2017-02-24

OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 1.21 Up 1.070