BreadTalk Group - RHB Invest 2016-08-04: Awaits Life After Death

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BREADTALK GROUP LIMITED 5DA.SI 

BreadTalk Group - Awaits Life After Death

• We expect the food atrium division to remain a drag on BreadTalk’s full- year results on the back of a difficult operating environment and write-offs from its streamlining process. 
• However, this should be partially mitigated by margins expansion at its bakery and restaurant businesses. 
• We also think that 2H16 should begin to see some improvements. This is because the bulk of its store closures have been completed. 
• We maintain our BUY call and SGD1.45 TP (30% upside), which is pegged to 6x FY16F EV/EBITDA.

Stronger 2H for the food atrium business. 

• According to management, the bulk of the evaluation process for the food atrium division has been completed. This was following the closure of the Tianjin and Chengdu food courts in 2Q16. It said that the entire store rationalisation exercise should be completed in the next quarter or so. Hence, despite weaker sales in China, we think 2H16 should be better for BreadTalk Group (BreadTalk), with lesser write-offs attributed to store closures.
• Meanwhile, in Singapore, the group’s food court at Ion Orchard completed its renovation works in May. Thus, a full quarter of contribution from 3Q16 should also help to alleviate this division’s bottomline.

Twin engines running. 

• Improved supply chain management has led to higher operating margins for BreadTalk’s bakery division. 
• Management said that its bakeries’ EBITDA margins have now caught up with Toast Box’s. 
• With the mid- Autumn and Christmas festivities in the latter half of the year, we expect the margins expansion to continue into 2H.
• Powered by Din Tai Fung, the restaurant division continues to deliver steady results. 
• Topline growth is likely to be driven by new outlets in Singapore and Bangkok in the near term.

Maintain BUY and SGD1.45 TP. 

• We believe BreadTalk will come out stronger in 2017. This is because, by then, the streamlining processes for all three of the group’s divisions would have been completed.
• Our forecasts for BreadTalk remain unchanged. We reiterate our BUY recommendation and SGD1.45 TP, which is pegged to 6x FY16F P/E. 
• The key risk to our call is a continued slowdown in the group’s China businesses

Juliana Cai RHB Invest | http://www.rhbinvest.com.sg/ 2016-08-04

RHB Invest SGX Stock Analyst Report BUY MAINTAIN BUY 1.45 Same 1.45