BreadTalk Group - RHB Invest 2016-02-26: Challenging Times

BreadTalk Group - RHB Invest 2016-02-26: Challenging Times  BREADTALK GROUP LIMITED 5DA.SI 

BreadTalk Group - Challenging Times 

  • BreadTalk continues to see demand weakness, especially in China where most of its stores are situated in shopping malls. 
  • However, its business restructuring remains on track and we believe bottomline margins would improve as cost management controls and under-performing stores closures are implemented. 
  • The group also announced the divesting of its investment in 112 Katong for SGD16m (SGD8.5m gain) in January. 
  • Maintain BUY with a SGD1.42 TP (from SGD1.65, 37% upside). 

FY16 profit growth to be driven by bottomline gains. 

  • We expect revenue growth and same-store sales growth (SSSG) to remain weak, especially in China where customer footfalls have fallen significantly in shopping malls. However, bottomline is likely to grow as start-up expenses decline and underperforming stores are closed.

Impairments affecting bottomline. 

  • Management impaired SGD5.3m in FY15, mainly for write-offs at under-performing food courts in China. This follows the SGD3.1m in FY14, mainly for Ramen Play. 
  • We believe this would contribute to better bottomline going forward. 
  • Net of all fair value/impairment adjustments, profit would be SGD12.4m in FY15 (down 19% YoY). 

Depreciation appears to have plateaued in 4Q15. 

  • With a less aggressive store opening plan, we believe BreadTalk’s depreciation is to slowdown and that the plan to extract more profitability from existing stores is on track. 
  • EBITDA grew 9% YoY in FY15 despite the challenges, especially in China. 
  • The key risk is a more drastic slowdown in China. 

Maintain BUY. 

  • We cut our FY16F-17F earnings by 32-39% to account for demand weakness in China and introduce FY18 numbers. 
  • Despite the weak results, we believe inherent value remains and the positive business restructuring is on track. Our TP is cut SGD1.42 (from SGD1.65), pegged to 6x FY16F EV/ EBITDA.

James Koh RHB Research | 2016-02-26
RHB Research SGX Stock Analyst Report BUY MAINTAIN BUY 1.42 Down 1.65