BreadTalk Group Ltd - DBS Research 2017-04-04: Piping hot bread in the making

BreadTalk Group Ltd - DBS Vickers 2017-04-04: Piping hot bread in the making BREADTALK GROUP LIMITED 5DA.SI

BreadTalk Group Ltd - Piping hot bread in the making

  • We see earnings recovering led by Foodcourt business which has turned around in 4Q16.
  • Bakery’s cost rationalisation & better Din Tai Fung sales mix will support operating margin expansion.
  • Project 3-year CAGR growth of 63% for FY16-FY18F.
  • Re-instating coverage with BUY and SOTP-based TP of S$1.69 backed by investment properties worth S$0.43 per share.

Foodcourt earnings has turned around in 4Q16 and poised for growth. 

  • BreadTalk is poised for earnings growth this year. After dismal performances in FY15 and 1H16, we saw a turnaround in 2H16 earnings. Its cost saving initiatives led to margin improvements and we saw a recovery of its Foodcourt business through outlet rationalisation in China.
  • We see earnings recovery momentum spilling over to FY17F.

All three business segments are now better positioned for earnings growth. 

  • We forecast core earnings CAGR of 63% for FY16-FY18F on the back of earnings recovery and a low base.
  • Turnaround of its Foodcourt business in China, better Bakery cost efficiencies, and outlet expansion of high margin Din Tai Fung restaurants will collectively drive earnings growth in the medium term. 
  • BreadTalk’s valuation based on its core business (ex-property investments) is compelling at 18x FY17F PE.

Share price backed by property investments worth S$0.43 per share. 

  • The valuation of BreadTalk’s property investments based on current market value implies an upside of 3% over their book value. 
  • BreadTalk has a track record of monetising its property investments (111 Somerset and 112 Katong). Successful sale of property investments above market valuation is a possible share price catalyst.

Reinstate coverage with BUY and S$1.69 TP based on SOTP. 

  • We value BreadTalk’s core retail business at S$1.33 per share pegged to 22x PE, in line with peers. 
  • Together with property investments and net debt, BreadTalk’s TP is S$1.69, offering 25% upside. 
  • Reinstating coverage with a BUY recommendation

Alfie YEO DBS Vickers | Andy SIM CFA DBS Vickers | http://www.dbsvickers.com/ 2017-04-04
DBS Vickers SGX Stock Analyst Report BUY Initiate BUY 1.69 Same 1.69