BreadTalk Group Ltd (BREAD SP) - DBS Research 2018-02-23: Special Dividend Surprise

BreadTalk Group Ltd (BREAD SP) - DBS Vickers 2018-02-23: Special Dividend Surprise BREADTALK GROUP LIMITED 5DA.SI

BreadTalk Group Ltd (BREAD SP) - Special Dividend Surprise

  • BreadTalk Group's FY17 earnings slightly below on higher than expected staff costs.
  • Final and special dividend of 5 Scts above expectations.
  • Positive outlook driven by new stores and cost management, and improving core margins.
  • Valuation attractive at c.18x core FY18F PE; maintain BUY with higher S$2.05 Target Price based on SOTP.

What’s New 

FY17 slightly below expectations. 

  • BreadTalk’s FY17 earnings came in slightly below our expectations on higher than expected operating costs. Revenue and gross profit of S$599.7m (-2.5% y-o-y) and S$333.3m (-1.2%) were in line with expectations. 
  • The key reason for the decline in revenue was lower store count from consolidation of Food Atrium outlets and restructuring of franchise stores particularly in China. EBIT was S$35.9m (+10.5% y-o-y), below our S$39.9m estimate, largely due to higher than expected administrative expenses. Otherwise, BreadTalk’s operations showed improvements in gross profit (55.6%, +0.7ppt) and EBIT margins (6%, +0.7ppt). 
  • Final and special dividend declared of 2 Scts and 3 Scts respectively exceeded our expectations of a total of 4 Scts.

Outlook remains positive. 

  • 2017 saw the cleaning up of nonperforming franchisees for Bakery, turnaround in food court profitability and restaurant division performance being on track. Except for higher admin costs which trailed our expectations, other P&L items were largely in line with expectations. 
  • As FY17 results was only slightly below, we do not expect admin costs to be a huge threat to our earnings forecasts going forward. BreadTalk’s strategy remains largely unchanged with revenue targeted to be S$1bn in 5 years and net margin to rise from c.3% currently to 8% eventually. 
  • We expect new store openings for 2018 to be c.10% of the current number of outlets for bakery, 2-3 new Din Tai Fung outlets, and 1-2 new foodcourts.

Earnings for FY18-19F largely unchanged as earnings drivers remain intact. 

  • We have kept our net profit projection for FY18-19F as growth is headed in the right direction.
  • BreadTalk’s operating margins continues to improve, except that we had expected much lower admin expenses. Earnings should continue to be led by new store openings and cost management initiatives, including new cooperation with Shinmei that can potentially drive down cost of goods and derive better margins.

Maintain BUY, SOTP-based Target Price higher at S$2.05. 

  • Our positive stance for the stock continues as financial performance of BreadTalk remains on a growth trajectory. Higher than expected special dividends will support the share price, while any property sale going forward could potentially be a share price catalyst. 
  • We derive a higher target price for BreadTalk from a higher carrying value of BreadTalk’s Shanghai Luidi China investment property which is now valued at S$39.5m or 72% higher than FY16. Core PE ex investments remain attractive at c.18x FY18F PE. 
  • Maintain BUY for close to 20% upside including dividends.

Alfie YEO DBS Vickers | Andy SIM CFA DBS Vickers | 2018-02-23
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.05 Up 2.010