Breadtalk Group Ltd - DBS Research 2017-11-07: Dough Is Holding Shape

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BREADTALK GROUP LIMITED 5DA.SI

Breadtalk Group Ltd - Dough Is Holding Shape

• 3Q17 earnings in line, Restaurants and Food Atrium offset Bakery’s drag on operating profit.
• Interim DPS of 1 Sct declared.
• Sale of AXA Tower a potential catalyst.
• Maintain BUY and S$2.01 TP.

Maintain BUY, TP raised to S$2.01. 

• We remain positive on BreadTalk over continued consolidation of underperforming outlets that will yield better margins going forward and sale of stakes in properties such as CHIJMES and AXA Tower that will unlock shareholder value if they materialise. 
• Based on 3Q17 results, growth drivers remain intact and turnaround in Bakery division led by store growth and better profitability in FY18F will drive earnings growth next year. 
• BreadTalk’s valuation, based on its core business (ex-property investments), is compelling at 17x FY18F PE.

Where we differ. 

• We believe consensus has yet to factor in the value of BreadTalk’s investment properties into its share price.
• BreadTalk’s core business is undervalued at 17x FY18F PE after stripping out the value of investment properties from the current share price. 
• Applying a 22x PE valuation to the retail business and adding back the value of its investment properties, our derived a target price is S$2.01, which is above consensus.

Potential catalyst. 

• We see potential for special dividends if Perennial sells AXA Tower. BreadTalk could pay c.4.5 Scts in special dividends upon the sale of AXA Tower based on our estimates.

Valuation

• Our TP of S$2.01 is derived from a sum-of-parts (SOTP) valuation. 
• On a per share basis, we value its retail business at 22x FY18F PE at S$1.71, investment properties at S$0.43 based on market value, net debt at -S$0.13 per share.

Key Risks to Our View

• Operational risks include food safety and licences as well as negative publicity. In extreme cases, food operating licences can be revoked for lapse in food safety. 
• Negative publicity may also result in weaker demand and poorer marketability when selling its franchises as the public and franchisees shy away from their association with BreadTalk.

WHAT’S NEW - 3Q17 results 

3Q17 within estimates. 

• Headline earnings of S$4m (+22% yo-y) and revenue of S$154m (-2% y-o-y) were in line with our forecasts. Revenue declined 7.8% y-o-y due to lower sales across all divisions.

Lower revenue dragged by Bakery division. 

• Bakery revenue declined 2% y-o-y to S$77.2m, affected by
  1. the termination of underperforming franchisees in China and Shanghai; and 
  2. lower revenue from directly operated stores in Shanghai and Beijing. 
• Food Atrium revenue declined by 9.4% y-o-y to S$36.8m on lower number of outlets (decrease of three outlets). Restaurant sales (Din Tai Fung) improved 8.3% y-o-y to S$31.1m.

4orth, a separate segment carved out for F&B new concepts.

• BreadTalk reported separate segmentals for 4orth, a new F&B business concepts division. The division has the five operating outlets of Sō, a rebranded concept from RamenPlay, and 90%-owned Song Fa Bak Kut Teh in China and Thailand.
• EBITDA and EBIT for 9M17 were S$0.3m and -S$0.4m respectively. These numbers were carved out from the Restaurant segment which previously consolidated them. This leaves the Restaurant segment with just the Din Tai Fung operations.

Bakery division led to lower margins. 

• Headline gross and operating margins declined to 55.2% (-1.1ppt) and 6.7% (- 1.7ppt) on Bakery’s higher raw material costs and lower profitability from directly operated stores in Singapore and Shanghai, and rationalisation of underperforming franchisees.
• While group margins were lower, Food Atrium’s operating margin improved to 7.6% from an operating loss in 3Q16.

Restaurant's operating margins remained at 21%.

• Operating profit decline was within expectations. EBITDA was S$20.9m (-19.1% y-o-y) while EBIT was at S$10.4m (-21.2% y-o-y). Lower one-off items such as PPE write-offs and disposals gain/loss helped PBT and PAT to reach S$9m (+8.4% y-o-y) and S$4m (+22.2% y-o-y) respectively. 
• An interim dividend of 1 Sct was declared, in line with expectations.

3Q17 tracking our estimates. 

• We have anticipated lower operating profit led by lower revenue from the Bakery division undergoing store franchisee rationalisation. Therefore, this set of results is largely expected. While headline operating profit declined slightly due to ongoing restructuring of the Bakery Division, Restaurant Division and Food Atrium Division remained positive with revenue and operating profit growth respectively.

Asset sale remains a likely stock catalyst. 

• We remain positive on the stock as
  1. continued consolidation of underperforming outlets will contribute to better margins going forward;
  2. sale of stake in properties such as CHIJMES and AXA Tower will unlock shareholder value if they materialise;
  3. full-year headline earnings may even track slightly ahead due to comparatively lower one-off items.

Maintain BUY, S$2.01 TP. 

• Our earnings remain largely unchanged and outlook continues to track our estimates.
• BreadTalk’s results are largely led by its Bakery division as seen in this 3Q17 numbers. Post restructuring of Bakery franchisees in China this year, we expect store opening and revenue growth to resume from FY18F onwards. 
• No change to our recommendation since long-term growth drivers remain intact. Maintain BUY on the stock.

Alfie YEO DBS Vickers | Andy SIM CFA DBS Vickers | http://www.dbsvickers.com/ 2017-11-07

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.010 Down 2.040