BreadTalk Group - RHB Invest 2017-01-03: A Blessing To Eat

BREADTALK GROUP LIMITED 5DA.SI

BreadTalk Group - A Blessing To Eat

After spending the past three years doing housekeeping for each of its divisions – from restaurants to bakeries and food courts – we believe 2017 could be an exciting year for BreadTalk as it has finally weeded out underperforming stores.
We expect to see its restaurant segment chart a steady performance, its bakeries to record improving operating efficiency, and its food atrium business to turn around after undergoing a rationalisation process in 2016.

According to BreadTalk’s management, the underperformance of its food atrium division is now under control. We expect its food atrium segment to be profitable in 2017, after it closed nine non- performing food atriums this year.
It would also focus on opening food atriums in cities where it already has a strong track record, in order to prevent future missteps.

We expect its bakery segment to continue seeing margin improvements, as the group has stepped up the efficiency of its supply chain. As BreadTalk continuously works on innovating its products, it also frequently launches new products for its bakery segment in order to keep its brand fresh. In addition, its Toast Box restaurants have introduced new products in its menu to boost ticket sales per head.
We see further growth opportunities if BreadTalk is able to sell more of its value-added products to its chain of franchisees.

We used a forward FY17F EV/EBITDA of 5x to derive a TP of SGD1.45, which also implies 16.5x FY17F P/E. The stock is currently trading at 4x FY17F EV/EBITDA. Thus, we think BreadTalk is undervalued compared to its regional small-cap food and beverage peers which are trading at an average of about 7x.

BreadTalk has also just secured the franchisee rights to operate Din Tai Fung restaurants in the UK. A sudden and rapid expansion of its network of restaurants in UK could lead to substantial start-up expenses. Failure to attract the UK crowd could also result in long gestation periods and a slow payback period.
Other key risks to our earnings would include a further slowdown in China’s economy – which may lead to even lower footfall in malls and, hence, to BreadTalk’s bakeries and food atriums.

Juliana Cai CFA RHB Invest | http://www.rhbinvest.com.sg/ 2017-01-03

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