BreadTalk Group Ltd - Piping hot bread in the making
- We see earnings recovering led by Foodcourt business which has turned around in 4Q16.
- Bakery’s cost rationalisation & better Din Tai Fung sales mix will support operating margin expansion.
- Project 3-year CAGR growth of 63% for FY16-FY18F.
- Re-instating coverage with BUY and SOTP-based TP of S$1.69 backed by investment properties worth S$0.43 per share.
Foodcourt earnings has turned around in 4Q16 and poised for growth.
- BreadTalk is poised for earnings growth this year. After dismal performances in FY15 and 1H16, we saw a turnaround in 2H16 earnings. Its cost saving initiatives led to margin improvements and we saw a recovery of its Foodcourt business through outlet rationalisation in China.
- We see earnings recovery momentum spilling over to FY17F.
All three business segments are now better positioned for earnings growth.
- We forecast core earnings CAGR of 63% for FY16-FY18F on the back of earnings recovery and a low base.
- Turnaround of its Foodcourt business in China, better Bakery cost efficiencies, and outlet expansion of high margin Din Tai Fung restaurants will collectively drive earnings growth in the medium term.
- BreadTalk’s valuation based on its core business (ex-property investments) is compelling at 18x FY17F PE.
Share price backed by property investments worth S$0.43 per share.
- The valuation of BreadTalk’s property investments based on current market value implies an upside of 3% over their book value.
- BreadTalk has a track record of monetising its property investments (111 Somerset and 112 Katong). Successful sale of property investments above market valuation is a possible share price catalyst.
Reinstate coverage with BUY and S$1.69 TP based on SOTP.
- We value BreadTalk’s core retail business at S$1.33 per share pegged to 22x PE, in line with peers.
- Together with property investments and net debt, BreadTalk’s TP is S$1.69, offering 25% upside.
- Reinstating coverage with a BUY recommendation