BreadTalk - RHB Invest 2018-08-03: Too Pricey A Bread

BreadTalk - RHB Securities Research 2018-08-03: Too Pricey A Bread BREADTALK GROUP LIMITED SGX:CTN

BreadTalk - Too Pricey A Bread

  • Downgrade to SELL from Neutral with new SGD1.00 Target Price from SGD1.04, 12% downside.
  • BreadTalk’s share price has performed well YTD. Trading at 33x FY19F P/E, we think valuation is steeper compared to peer average of 18x.
  • Following a weak 1H18, we believe full-year earnings would decline y-o-y, with higher overhead cost in 2H resulting from the opening of Wu Pao Chun bakery, Nayuki, Tai Gai and UK Din Tai Fung as well as weaker performances from associates and JV.

2Q18 results missed.

  • BreadTalk’s 2Q18 PATMI was dragged down by losses from associates and JV as well as higher-than-expected effective tax rate. The weaker performance was attributed by Jumbo China, Carl’s Jr Shanghai and BreadTalk-Minor Thailand.

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Food Atrium growth offset by lower profitability from Bakery.

  • Food Atrium result shone in 2Q18, with a record low vacant rate of 1.5%. EBITDA margin grew 5ppts leading to a 44% surge in EBITDA. 
  • We expect 2H18 results from Food Atrium division to remain stellar, as the team strives to achieve 0% vacancy rate. This was however offset by lower profitability from the Bakery division due to the closure of franchisees in China.

Expect near-term volatilities from new investments.

  • Over the next six months, it is looking to open 2-3 Song Fa eateries in China and Thailand; a Wu Pao Chun bakery in China; Nayuki cafe, Tai Gai tea in Singapore, as well as a Din Tai Fung restaurant in UK. CFO, Mr Chan Ying Jian also cited that BreadTalk may sign two new food & beverage (F&B) concepts this year.
  • As we see it, while these new F&B concepts could have derive higher margins in the long run, the opening of these new stores would result in higher overheads and branding costs over the next 12 months, slowing EBITDA growth. 
  • Coupled with negative performances from associates and JV and higher effective tax rate, we lower our FY18F-20F EPS by 16-19%.

Downgrade to SELL.

  • With the rising overhead costs and weaker JV and associates performance, we expect FY18F earnings to decline before a slow pick up in FY19F. 
  • BreadTalk’s core F&B business (ex-investment property value) is trading at 8.2x FY19F EV/EBITDA. Though this is already a discount to peer average (10x FY19F EV/EBITDA), we think there could be more downside, given that its 3-year EPS CAGR of 6% pales in comparison to peer average of 14%.
  • On a P/E basis, valuation looks steeper at 33x FY19F P/E vs peer average of 18x. We believe there is limited upside at the moment, as it would have to outperform market expectations for further positive movement in share price.
  • Key upside risks are faster breakeven period for new F&B concepts and ability to secure new BreadTalk franchisees to raise margins in the Bakery segment.

Juliana Cai CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-08-03
SGX Stock Analyst Report SELL Downgrade NEUTRAL 1.00 Down 1.040