BreadTalk Group - Witnessing a Turnaround
- Maintain BUY with a slightly higher SGD1.50 TP (from SGD1.45, 15% upside) as we continue to witness a turnaround in BreadTalk’s core businesses.
- In 2017, we expect its bakery segment to continue to deliver as it consolidates its franchisee network.
- Rationalisation of its food atrium segment has also been completed. We expect this segment to show positive contributions this year.
- Further divestment in its investment properties would be a key catalyst to the stock price.
Reiterate BUY with SGD1.50 TP.
- We upgrade our TP to SGD1.50 pegged to 6x core EV/EBITDA.
- We use core EBITDA to better reflect the strong operating cash flow generated from the food & beverage (F&B) businesses.
Bakery in the limelight.
- Its bakery segment’s FY16 margins beat our expectations. In FY17F, management would focus on reconfiguring its bakery franchisees to optimise profitability. This would involve replacing weaker franchisees with stronger operators. With that, we expect to see better contributions from its bakery franchisees in the medium term.
Lower margins in restaurant segment.
- Improvement in bakery margins is however offset by weaker margins in the restaurant segment. This was mainly due to higher staff cost.
- Management cited that gross margin was higher in FY15 due to higher-valued products introduced during SG50 celebrations.
Monetising past investments.
- BreadTalk divested its investment in Katong 112 in FY16 and TripleOne Somerset in 1Q17. The Group still holds other property investments including CHIJMES and Beijing Tongzhou Integrated Development, which we estimate to be worth about SGD127m or SGD0.34/share.
- We believe it is in the group’s strategy to unlock the value of its real estate investments to better deploy cash for future M&As. Any further divestment would be a key catalyst to share price.