Breadtalk Group Ltd - DBS Research 2017-08-03: Core Operations Improve

Breadtalk Group Ltd - DBS Vickers 2017-08-03: Core Operations Improve BREADTALK GROUP LIMITED 5DA.SI

Breadtalk Group Ltd - Core Operations Improve

  • BreadTalk's 2Q17 earnings in line, core earnings continue to recover.
  • DPS of 1Scts declared.
  • Sale of AXA Tower a potential catalyst.
  • Maintain BUY, TP raised to S$2.04.

Maintain BUY, TP raised to S$2.04. 

  • We maintain our positive stance on BreadTalk as we see earnings continuing to deliver growth, driven by a recovery in the Foodcourt segment. 
  • In 2Q17, BreadTalk’s core businesses continued to improve with Foodcourt now profitable and margin expansion from the Restaurant segment. The continued recovery in the Foodcourt segment will drive growth ahead. 
  • Potential sale of AXA Tower is a catalyst. BreadTalk’s valuation, based on its core business (ex-property investments), is compelling at 18x FY18F PE. BUY for 15% total return.


2Q17 results Core operations improve: 

  • Core operating profit (bakery, restaurant and foodcourt segments) continues to improve, rising 17% y-o-y to S$9.9m. While revenue declined 1.5% yo-y to S$148m dragged by lower bakery and restaurant sales, gross margins improved 0.9ppt to 55.9%. 
  • Headline operating profit which includes investment, elimination and others recorded a decline of 11% y-o-y to S$9.2m, but stripping these out, core operations remain healthy with operating profit growth of 17%. 
  • Foodcourt operations continue to improve with a turnaround in operating profit t to S$2m from S$3.4m loss in 2Q16. 
  • Operating margin from Bakery declined from 3.9% to 3.2%, but this was offset by a recovery in the foodcourt segment and slight improvement in operating margins from the restaurant segment to 15.6%. 
  • An interim DPS of 1 Scts was declared, above our expectations, and an increase from 0.5 Scts last year.

Potential enbloc sale of AXA Tower. 

  • Perennial Real Estate (PREH) has announced that the consortium of investors that own AXA Tower is considering an enbloc sale of the property at no less than S$1.65bn. The consortium has received a number of enbloc sale enquiries for the asset. This implies a selling price of S$2,150 psf based on post AEI total strata area of 767,358 sqft. The AEI (fully debt funded) of close to S$160m will be borne by the potential new owner. The consortium has appointed JLL and CBRE as joint marketing agents for the proposed sale of the property. No sale date is set at this point.
  • Based on our current valuation of S$1.25bn imputed in our SOTP model, BreadTalk’s 5.31% equity stake in AXA Tower is worth S$23m or 8.3 Scts per BreadTalk share (on 281m share base). At a sale price of S$1.65bn, BreadTalk’s equity stake would be worth S$45m or 16 Scts per share. This could potentially raise BreadTalk’s TP by another S$0.09. We estimate that BreadTalk could book a gain (net) of S$25m assuming a sale price of S$1.65bn, which could translate to a special dividend of 4.5 Scts assuming a 50% payout.

Maintain BUY, TP raised to S$2.04. 

  • While core business operating profit have collectively grown, we revise our headline earnings down by 5-6% to reflect the lower headline operating profit numbers, largely due to opex under investment, elimination and others segment. We reiterate our BUY recommendation on BreadTalk in view of
    1. group core earnings improving;
    2. potential special dividends from possible sale of AXA Tower; and
    3. longer-term share price catalyst from revaluation of Beijing Tongzhou Development.
  • Its core business currently trades at a compelling 18x FY18F earnings. 
  • Our TP of S$2.04, based on sum-of-parts (SOTP) valuation, is derived from S$1.73 for its retail business at 22x FY18F PE, S$0.43 for its investment properties based on market value, and -S$0.12 for its net debt. 
  • Buy for 15% total return (including dividends).

Where we differ. 

  • We believe consensus has yet to factor in the value of BreadTalk’s investment properties into its share price.
  • BreadTalk’s core business is undervalued at 18x FY18F 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 derived a target price of S$2.04, which is above consensus.

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 | 2017-08-03
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.04 Up 1.920