BreadTalk Group - RHB Invest 2018-01-26: Taking A Deeper Look At Its Value

BREADTALK GROUP LIMITED 5DA.SI

BreadTalk Group - Taking A Deeper Look At Its Value

BreadTalk has been one of our favourite consumer stocks. Its share price has appreciated by 53% over the past two years.
While earnings have turned around significantly after several major rationalisation exercises, we note that much of BreadTalk's share price movements were catalysed by its divestment of investment properties.
In this report, we discuss what investors may be buying into, if and when they buy BreadTalk shares.
We lift our Target Price to SGD2.09 (from SGD1.83, 21% upside) as we now take into account the value of its investment properties. Maintain BUY.

BreadTalk has invested in some non-core real estates in Singapore and China. Over the last two years, it has made significant gains from the divestment of investment properties, ie SGD8.5m from 112 Katong, and SGD9.2m from TripleOne Somerset.
The group has also consistently rewarded shareholders by paying out 45-60% of the divestment gains as special dividends.

It still has four investment properties, namely Chijmes, AXA tower, Beijing Tongzhou District Phase 1 (BJTZ1), and Beijing Tongzhou District Phase 2 (BJTZ2).
Based on independent valuations, we estimate these properties to be worth SGD143m, or close to 30% of BreadTalk’s market cap. Even if taken at cost value, they are still worth SGD72.1m, implying 15% of current market cap.

Stripping out the SGD143m worth of investment properties, BreadTalk’s current share price implies that its core food and beverage (F&B) business is only trading at FY18F EV/EBITDA of 3.8x, or FY18F P/E of 17.9x. This is at a discount, compared to its peer average EV/EBITDA of 15.2x and P/E of 25.6x.
Looking back, its core F&B business was already trading at FY13 EV/EBITDA of 3.7x (after stripping out investment properties value) when we first initiated coverage on the stock. We certainly think that its core F&B business is worth a rerating – given the stronger fundamentals after the change in management, and the major overhaul that has taken place over the past years to turn all three business segments around.

We derive our new Target Price using a SOP valuation, to better reflect the substantial value in BreadTalk’s investment properties. We still value the core business based on 6x EV/EBITDA. For its investment properties, we have conservatively taken the value at cost.
Moving ahead, we think the group’s core F&B business may chart a stronger performance through franchisee network expansion – which requires lower capex and produces higher margins.
We also expect to see more Din Tai Fung restaurants opening in Thailand this year.

BreadTalk has invested in several investment properties in the past, with the view that the strategic investment could give it the first right of refusal to prime retail space. Based on some of the latest available independent valuations, we estimate that its existing stakes in these investments to be worth at least SGD143m, or SGD0.51 per share. This easily represents 30% of BreadTalk’s market cap.

The investments in real estate have allowed BreadTalk to ride on the appreciation of property values.
Since 2016, BreadTalk began to realise some of its investments through the divestment of assets. In 2016, it generated a divestment gain of SGD8.5m from the sale of its stake in 112 Katong, and paid out 45% as special dividends.
Last year, the sale of its Tripleone Somerset generated a divestment gain of SGD9.2m and 60% was paid out as special dividends.
Looking ahead, we expect the next divestment to be AXA tower. BreadTalk owns 5.3% of AXA tower. We note that Perennial Real Estate Holdings (Perennial) had, on 1 Aug 2017, led its consortium of investors to consider the en bloc sale of AXA tower at no less than SGD1.65bn.

The group announced early this year that it has partnered the Perennial-syndicated consortium of partners to target high speed railway (HSR) investment opportunities in Tier-1&2 cities as well as provincial capitals in China. The first closing committed capital contribution for BreadTalk is USD25m.
While it is still early days for this new JV, the group announced that it may ride on this JV’s future investments to venture into the food manufacturing, and food catering for hospitals and eldercare facilities businesses.

Core F&B business trading at only 3.8x FY18F EV/EBITDA, after stripping out SGD143m of investment properties from the current market cap. This is a substantial discount, compared to its regional peers which are trading at an average of 15x forward EV/EBITDA.
In terms of forward P/E, BreadTalk’s core business is trading at 17.9x after we stripped out the real estate investment values. This is, again, undemanding – when compared to its peer average of 25.6x.

We also compare BreadTalk’s historical valuation. Like-for-like, we stripped out the value of its investment properties value and note that it was trading at 6.3x EV/EBITDA, when we first initiated coverage on the stock in Sep 2014. We believe that it is unjustified that BreadTalk’s current core business is trading at below 2014 valuations, since the fundamentals of the group have improved tremendously.
From 2013-2016, the group underwent a major rationalisation programme to weed out underperforming stores in its restaurant and food atrium segment, and implemented a better cost control strategy to raise the profitability of its bakery stores. It has also pared down its debt significantly. We believe BreadTalk’s portfolio of stores today is definitely in much better shape, compared 2014. Hence, its current valuation is certainly attractive.

Juliana Cai CFA RHB Invest | http://www.rhbinvest.com.sg/ 2018-01-26

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 2.09 Up 1.830