BreadTalk Group - RHB Invest 2018-02-23: A Special Ang Pow For The Lunar New Year

BREADTALK GROUP LIMITED 5DA.SI

BreadTalk Group - A Special Ang Pow For The Lunar New Year

2017 was an awesome year for BreadTalk. Excluding gains from the divestment of investment properties, its full-year core profit came in at SGD17.7m, an improvement of > 100%.
In view of the strong results, the company announced an additional special dividend of SGD0.01/share on top of the final dividend of SGD0.02/share.
We maintain our BUY call but think that there could near-term slowdown in earnings growth as the company is now back on its capex expansion phase. We revise our Target Price to SGD2.00 (from SGD2.09, 14% upside).

Following the completion of Food Atrium’s store rationalisation in 2016, this division saw the strongest margin expansion in 2017 in the absence of impairments and record-low vacant stall rates.
We think the outlook for Food Atrium remains bright in 2018, as BreadTalk seeks to explore more direct-operated restaurants with smaller outlet space and higher revenue. Such a concept requires lower capex and better control of tenant vacant rates, which should help to drive higher profitability for the group in the years ahead.

Revenue and EBITDA for the bakery segment fell by 3% and 21% y-o-y respectively as a result of underperformance in China and Singapore, and the closure of eight franchisees in China.
We believe this shortfall would be offset by the expansion of its franchisee network in other parts of Asia. We note that the group has formed a joint venture (JV) with United Malayan Land Bhd in Malaysia in Nov 2017 and appointed Som Datt Group as the master franchise in Delhi, India, early this year. We can expect more new stores to come from these strategic partners this year.

CEO, Mr Henry Chu, cited procurement as one of the weakest links when he worked with BreadTalk’s R&D team. The new JV with Shinmei Co Ltd should thus help improve its procurement cost. He believes that gross margin could potentially improve by 1ppt.
In the longer term, the JV could also help with the procurement for the company’s other partners.

4orth Division is the incubator division for new concept brands. So far, the first JV Song Fa outlet in China has outperformed management’s expectations during the first month.
We are fairly optimistic about this division as management expects the cash payback period to be less than 12 months. The group is also looking to partner with more F&B concepts in the months ahead.

We think that rising headquarters costs, pre-opening costs for Din Tai Fung in the UK, as well as new food & beverage (F&B) concepts could slow EBITDA growth momentum in the near term.
Management expect capex to double to around SGD70m in 2018. We note that overhead expenses also shot up by around SGD7m in FY17, mainly due to higher staff costs and bonuses. As such, we lower our SOP-derived Target Price to SGD2.00.
Nevertheless, we maintain our BUY call, as we believe valuations remain undemanding given that the core F&B business is currently trading at only 5.4x EV/EBITDA if we strip out the group’s investment properties.

Juliana Ca CFA RHB Invest | http://www.rhbinvest.com.sg/ 2018-02-23

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 2.00 Down 2.090