BreadTalk Group - OCBC Investment 2016-08-05: All eyes on Food Atrium business now

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BREADTALK GROUP LIMITED 5DA.SI 

BreadTalk Group: All eyes on Food Atrium business now

• Weaker earnings due to Food Atrium.
• Bakery and Restaurant continue to grow.
• DPS of 0.5 S-cents declared.

Dragged by similar factors

• BreadTalk Group’s 2Q16 revenue was down 3.3% YoY to S$149.8m while PATMI declined 55% to S$1.3m. 1H16 revenue was slightly down by 1% to S$304.3m, meeting 48% of our full year expectations, while PATMI dropped 23% to S$3.8m, forming 32% of FY16F estimates. If we strip out write-offs and divestment gains, 1H16 core PATMI would have been a net loss of S$1.2m vs. a profit S$6.7m in 1H15. 
• The weaker bottomline has been largely attributable to the Food Atrium business.

Cleaning up Food Atrium segment

• Food Atrium segment’s 1H revenue was down 5% to S$80.2m, while EBITDA dropped 77% to S$2.3m. Segment’s loss before tax widened from S$0.6m in 1H15 to S$7.6m in 1H16. 
• Similar factors played a role in the decline here, such as the slowdown in Mainland China operations, write-offs for outlet closures, gestation costs for new outlets and higher operating expenses. 
• For 2H16, we expect just a few more closures, while two new outlets are committed to open in Shanghai.

Steady growth in profits for Bakery and Restaurant

• Bakery segment’s 1H revenue was slightly down 2% to S$150.7m, due to weaker franchise revenue from China. On a QoQ basis, there was a net closure of 16 outlets that were mostly in China. Segment profit before tax was S$4.3m vs. S$2.6m in 1H15. 
• Looking at the Restaurant segment, 1H revenue rose 6% to S$73.5m, and segment profit before tax was higher at S$10.6m vs. S$7.7m in 1H15.

Looking for core profitability to pick up

• With steady earnings growth from Bakery and Restaurant segments, while the group keeps its focus on cost management, all eyes are on the Food Atrium segment for an eventual turnaround. 
• At this juncture, we prefer to stay cautious until we see pressure ease on Food Atrium and signs of a consistent pick-up in overall core profitability. 
• Rolling forward to 23x FY16/17F P/E, our fair value estimate is raised from S$0.96 to S$0.99. 
• Maintain SELL. Separately, an interim dividend of 0.5 S-cents/share was declared, similar to last year.

Jodie Foo OCBC Securities | http://www.ocbcresearch.com/ 2016-08-05

OCBC Securities SGX Stock Analyst Report SELL Maintain SELL 0.99 Up 0.96