Breadtalk Group Ltd - DBS Research 2017-06-09: CHIJMES / AXA Could Be Sold

BREADTALK GROUP LIMITED 5DA.SI

Breadtalk Group Ltd - CHIJMES/AXA Could Be Sold

Perennial shortlisted as a buyer for United Engineers may spark its need to raise funds.
BreadTalk has tag along rights if Perennial sells CHIJMES or AXA Tower.

Perennial shortlisted for potential United Engineers divestment.
Bloomberg reported on 31 May that United Engineers has picked Perennial over KKR & Co. and SingHaiyi, for final talks for a potential divestment.
OCBC, Great Eastern and the Lee family which founded OCBC Bank own more than 30% of United Engineers.

As at 1Q17, United Engineers’ NAV stood at S$3.06 per share. Our property desk evaluates that at the average historical transactions of 1x P/NAV, a takeover of United Engineers would cost S$1.9bn and funding will the key question for Perennial. It could potentially
1. raise funds via borrowings;
2. divest its assets to fund the acquisition; or
3. form a consortium of like-minded capital partners if the deal were to proceed.
Two of its properties which it could potentially divest are AXA Tower and CHIJMES, which BreadTalk has a stake in.
BreadTalk has a history of selling along with Perennial and has paid special dividends to shareholders. BreadTalk is a joint investor along with Perennial in AXA Tower and CHIJMES where it has tag along rights if Perennial chooses to sell.
In the previous sales of 112 Katong and 111 Somerset, it has “tagged along” with Perennial to sell off its stake in these two properties. These have resulted in special dividends paid to shareholders.

BreadTalk still has 5.31% of AXA Tower and 29% stake CHIJMES in Singapore. These properties’ market values are effectively worth S$66m and S$97m to BreadTalk, taking in account both debt and equity value.
The debt component of these two properties’ investment is undisclosed. However, we estimate them to be between c.60% and 70%. Equity values in both these properties are S$24m and S$64m, respectively, based on our estimated debt proportion taken out against the purchase of the respective properties.
The current market value of CHIJMES and AXA Tower based on latest valuation reports are S$334m and S$1.25bn respectively.

BreadTalk has proven that it has on both occasions of selling its stake in 112 Katong and 111 Somerset paid special dividends.
1. In 1Q16 it sold 112 Katong for a net gain of SS$8.5m and it paid out 1.35 Scts of special dividends equivalent to S$0.03 per share.
2. In 1Q17, BreadTalk also paid out 3.3 Scts per share (2 Scts) of special dividends in 1Q17 when it sold 111 Somerset for a net gain of SS$9.3m.
If Perennial chooses to raise funds via asset sale, it could potentially sell AXA Tower or CHIJMES, both of which could see BreadTalk selling out as well, effectively benefiting shareholders with possible special dividends.

We previously held the view that BreadTalk’s core earnings would turn around, 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. Its 1Q17 results clearly validate our view.
Going forward, we expect to see continued core profit improvement led by a more convincing turnaround of its Foodcourt business.

Beijing Tongzhou development is currently under development (Phases 1 and 2) and booked at cost. It is a mixed use development with retail, office and residential elements and 8.4m sqft of GFA. We see upside to the value of Beijing Tongzhou once the development completes.
The Tongzhou District is Beijing’s new Central Business District located in the South East of Beijing, c.23 km from Beijing's city centre, c.16 km from the Beijing Capital International Airport, and c.9 km from the US$3.3bn Universal Studios Beijing, which will be one of the largest theme parks in China.
Construction and commencement of operation is expected to complete by 2018.

Reiterate BUY, TP raised to S$1.92.
We reiterate our BUY recommendation on BreadTalk as
1. earnings are turning around;
2. potential catalysts of special dividends from possible sale properties if Perennial sells these properties to raise funds to buy United Engineers; and
3. longer-term share price catalyst from revaluation of Beijing Tongzhou Development.
Its core business currently trades at a compelling 16.8x FY18F earnings.
Our TP of S$1.92, based on sum-of-parts (SOTP) valuation, is derived from S$1.58 for its retail business at 22x blended FY17/18F PE, S$0.42 for its investment properties based on market value, and -S$0.07 for its net debt.

We believe consensus has yet to factor in BreadTalk’s investment properties into its share price.
BreadTalk’s core business is undervalued at 16.2x FY17/18F 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$1.92, which is above consensus.

We see potential for more special dividends if Perennial’s need to raise funds leads to the sale of AXA Tower or CHIJMES.
BreadTalk has tag along rights and has monetised along with Perennial for 111 Somerset and 112 Katong before. The revaluation of Beijing Tongzhou Development will also be another share price catalyst.

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/ 2017-06-09

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.92 Up 1.690