BreadTalk Group - RHB Invest 2017-08-03: Steadily Cruising Along

BreadTalk Group - RHB Invest 2017-08-03: Steadily Cruising Along BREADTALK GROUP LIMITED 5DA.SI

BreadTalk Group - Steadily Cruising Along

  • BreadTalk has generated a 55% return YTD. We now roll over our valuation to FY18F and derive a higher Target Price of SGD1.83 (from SGD1.60, 2% upside). 
  • Downgrade to NEUTRAL as we think the market has priced in BreadTalk’s near-term growth outlook. 
  • Key upside catalysts for the stock includes divestment gain from property investments, faster-than-expected roll out of bakery franchisees and reduction in effective tax rate.

2Q17 result was in line with our expectation. 

  • BreadTalk's 2Q17 PATMI grew by 61% YoY to SGD2.1m. This was mainly driven by a strong turnaround in the Food Atrium business following the consolidation of operations last year. 
  • Despite lower revenue due to store closure, EBITDA margin for the division surged 12.1ppt to 15.8% last quarter. 
  • Vacancy rate at the food atriums also remained at record low of under 3%.

2Q17 revenue fell by 1.5% YoY to SGD148m. 

  • Restaurant was the only division with revenue growth; revenue in the Restaurant segment increased by 4% YoY to SGD37.9m. This was mainly contributed by the conversion of two RamenPlay Outlets to Sō at Nex Serangoon and BreadTalk HQ. The revenue contributed by these conversions was significantly higher. 
  • We note that BreadTalk remains focused on improving earnings quality this year. 

Bakery underperformed. 

  • Revenue for the Bakery division declined 3.4% YoY to SGD72.3m due to the termination of underperforming franchisees. EBITDA margin also declined 0.9ppt on higher raw material cost and weaker revenue at the Shanghai and Beijing direct operated stores. 
  • BreadTalk has been searching for stronger franchisee operators in China to replace the non-performing ones. 
  • We expect margins for this division to recover once the new franchisees open new outlets.

Potential special dividend from sale of AXA tower. 

  • BreadTalk owns 5.31% stake in the investment vehicle that owns the AXA Tower. With Perennial’s announcement of the possible sale of AXA Tower, at no less than SGD1.65b, BreadTalk would register a one-off divestment gain of SGD25m if the sale goes through. 
  • Assuming a 50% payout ratio, we think there is a potential for a special dividend of SGD0.045 per share. This would raise total dividend to SGD0.09 per share, implying a 5% dividend yield. 
  • We have not factored this sale into our model.

Downgrade to NEUTRAL and TP SGD1.83. 

  • We raised our TP to SGD1.83 pegged to a 6x forward EV/core EBITDA as we roll over our valuation to FY18F. 
  • We continue to like BreadTalk for its steady recovery in the food atrium division but we note that the market could have priced in its near-term growth story. 
  • Performance of its newly secured franchises – UK’s Din Tai Fung and Song Fa Bak Kut Teh in China and Thailand could be key swing factors.

Juliana Cai CFA RHB Invest | 2017-08-03
RHB Invest SGX Stock Analyst Report NEUTRAL Downgrade BUY 1.83 Up 1.600