BreadTalk Group - RHB Invest 2015-11-11: Dragged down by China operations

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BREADTALK GROUP LIMITED 5DA.SI 

BreadTalk Group (BREAD SP) - Dragged down by China operations 

• 3Q15 results were below expectations, with the slowdown in China having a bigger negative impact than our earlier expectations. 
• Profit was further exacerbated by start-up expenses from the opening of 3 new food courts during the quarter. 
• EBITDA however, continues to grow and we believe the overall operations remain relatively resilient. 
• We lowered our TP to SGD1.65 (38% upside, previously SGD1.90) and maintain our BUY recommendation. 

 Poor set of results, dragged down by China. 

• 3Q15 net profit came in at just SGD1.6m, significantly lower than last year while revenue growth was just 4.7% YoY, which is a weaker momentum compared to recent years. Bakery and Food Atrium businesses were significantly weaker in China (which accounts for almost half of the revenue in these divisions), due to the low customer footfall in malls. 
• Profit was further dragged down by higher effective tax rates due to the overall loss in China. 

 Profit now mostly from Din Tai Fung restaurants. 

• With ongoing weakness in its other business divisions, we estimate that for 9M15, more than 80% of Group profit is contributed by the Din Tai Fung restaurants in Singapore. This continues to be a cash cow, and EBITDA for restaurant division was up 44% YoY in 3Q15. 
• We expect further upside over the next twelve months as management close down more of the remaining 10 Ramen Play restaurants as their leases expires. 

 Short-term pains which will bear fruits in higher margins. 

• The company opened 3 new food courts in 3Q15, which resulted in start-up expenses and higher depreciation for the period. Going forward, management will focus on improving margins. This includes instilling higher discipline for new store openings and capex expenses, and consolidating unprofitable stores if necessary. 

 EBITDA still growing, medium-term investment case remains intact. 

• EBITDA was up 11% YoY, on better EBITDA margins. We believe overall operations remain relatively resilient despite market weakness. 
• We now expect FY15F net profit to be significantly lower than FY14F and cut our FY16-FY17F earnings by 18/13%. 
• We lowered our TP to SGD1.65, pegged to 7x FY16F EV/EBITDA.

James Koh RHB Research | http://www.rhbinvest.com.sg/ 2015-11-11

RHB Research SGX Stock Analyst Report BUY MAINTAIN BUY 1.65 Down 1.90