Breadtalk Group Ltd - DBS Research 2017-05-04: Core Operations Turning Around

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BREADTALK GROUP LIMITED 5DA.SI

Breadtalk Group Ltd - Core operations turning around

• 1Q17 in line, growth fueled by all three segments.
• Special dividends of 2 Scts declared.
• Earnings turnaround on track.
• Maintain BUY and S$1.69 TP.

Maintain BUY and S$1.69 TP. 

• BreadTalk’s earnings turnaround is on track. After dismal performances prior to 1H16, we saw a turnaround in 2H16 and 1Q17 earnings. 
• Profitability in all its three businesses, especially recovery of its Foodcourt business from losses has helped its earnings to turn around. We see earnings recovery momentum spilling over to subsequent quarters. 
• A recovery of its Foodcourt business in China, better Bakery cost efficiencies, and expansion of the number of outlets in the high margin Din Tai Fung restaurants will collectively drive earnings growth. 
• BreadTalk’s valuation based on its core business (ex-property investments) is compelling at 18.5x FY17F PE.

Results review 

1Q17 in line. Earnings of S$10.7m was within expectations.

• Revenue declined by 4.5% y-o-y to S$148m. However, this was made up by an improvement in operating margins of its core businesses. 
• Headline earnings of S$10.7m included S$9.95m of one-off gains. Even though core earnings was only slightly above breakeven, this is a marked improvement from 1Q16, which reported core losses of S$5.8m. The business divisions especially Foodcourt is on track for turnaround. 
• BreadTalk declared special dividends of 2 Scts per share following the successful sale of 111 Somerset.

On track for earnings turnaround. 

• We previously held the view that BreadTalk’s core earnings would turnaround, led by better operating efficiencies from its three divisions. In particular, the Foodcourt business is expected to turn profitable compared to losses it incurred last year. 
• Growth will therefore be led by cost efficiencies rather than sales growth. 1Q17 results clearly validates our view. 
• Going forward, we expect to see continued core profit improvement led by more convincing turnaround of its Foodcourt business.

Where we differ. 

• We believe consensus has yet to factor in BreadTalk’s investment properties into its share price. 
• BreadTalk’s core business is undervalued at 18.5x PE after stripping out the value of investment properties from the current share price. Applying a 22x PE valuation to the retail business and adding back the value of its investment properties, we have derived a target price of S$1.69, which is higher than consensus.

Potential catalyst. 

• 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.

Valuation

• Our TP of S$1.69 is derived from a sum-of-parts (SOTP) valuation. 
• On a per share basis, we value its retail business at 22x FY17F PE at S$1.33, investment properties at S$0.43 based on market value, net debt at -S$0.07 per share.

Key Risks to Our View

• Operational risks include food safety and licences as well as negative publicity. In extreme cases, food operating licences can be revoked for lapse in food safety. 
• Negative publicity may also result in weaker demand and poorer marketability when selling its franchises as the public and franchisees shy away from their association with BreadTalk.

Alfie YEO DBS Vickers | Andy SIM CFA DBS Vickers | http://www.dbsvickers.com/ 2017-05-04

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.690 Same 1.690