BreadTalk Group - RHB Invest 2016-07-08: The Dough Will Rise Again

BreadTalk Group - RHB Invest 2016-07-08: The Dough Will Rise Again BREADTALK GROUP LIMITED 5DA.SI 

BreadTalk Group - The Dough Will Rise Again

  • We reiterate our BUY call on BreadTalk. We think the group is headed in the right direction in improving its profitability with the following initiatives:
    1. More Din Tai Fung restaurants;
    2. Store rationalisation in the food atriums segment;
    3. Focusing on operational efficiencies.
  • We raise our TP to SGD1.45 (from SGD1.42, 27% upside), as we increase our earnings forecasts by 7-14% over FY16-18F.

Powering up xiao long bao. 

  • While consumer spending continues to be weak in Singapore, our recent ground checks shows that Din Tai Fung frequently chalks up queues outside its restaurants during peak dining hours. According to management, the demand for Din Tai Fung continues to be high, and there is potential for at least 5-10 more such restaurants locally. 
  • We note that BreadTalk Group (BreadTalk) is looking to expand the brand’s footprint, both locally and overseas. Given that this division contributes > 95% to the group’s operating profit, a faster-than-expected increase in store count will help boost earnings.

Awaiting life after death. 

  • As shopper traffic weakens in China, we think BreadTalk’s rationalisation of its food atriums will bode well for the group. It closed five food atriums in 1Q16, and we believe there could be a few more closures in FY16. This will lead to more write-offs. Following the closure of non- performing stores, the profitability of BreadTalk’s food atrium division should turn around in FY17.

Sweating the asset. 

  • BreadTalk’s bakery division is working on its supply chain efficiencies to maintain its bottomline amidst a slower expansion pace. We understand that the group is in the midst of developing a digital system to reduce wastage and BreadTalk has since seen a 1ppt YoY improvement in EBITDA margin in 1Q16. 
  • While weakness in same store sales is likely to persist, we think the improvement in operational efficiencies will help to sustain this division’s operating profit, in absolute figure terms. 
  • BreadTalk is also working on product innovation to keep its brand fresh and improve gross margins.

Maintain BUY, with a higher SGD1.45 TP. 

  • We increase our FY16F-18F earnings by 7-14% to reflect higher margins in the restaurants division after the completion of Ramen Play’s restructuring. This is partially offset by FY16F losses in the food atrium business. This raises our TP to SGD1.45 (from SGD1.42), which is pegged to 6x FY16F EV/EBITDA and implies a 27% upside. 
  • We expect earnings to grow at a CAGR of 40% over FY15-18 due to a low base effect in FY15 as well as margins expansion from the completion of its restructuring initiatives. 
  • A continued slowdown in BreadTalk’s China business is a key risk. 
  • This report marks the transfer of coverage to Juliana Cai.

Juliana Cai RHB Invest | http://www.rhbinvest.com.sg/ 2016-07-08
RHB Invest SGX Stock Analyst Report BUY MAINTAIN BUY 1.45 Up 1.42