BreadTalk Group Ltd - DBS Research 2019-02-20: Earnings Driven By Food Atrium


BreadTalk Group Ltd - Earnings Driven By Food Atrium

  • 4Q18 earnings in line as Food Atrium drives EBIT growth and margins. 
  • Final DPS of 1 Sct declared. 
  • Lower FY19-20F earnings by 6% to factor in longer EBIT breakeven at 4orth division. 
  • Maintain HOLD, lower target price of S$0.92. 

Maintain HOLD, with lower Target Price of S$0.92.

  • We continue to be neutral on BREADTALK GROUP LIMITED (SGX:CTN) as we anticipate a mixed earnings growth outlook ahead.
  • We see longer EBIT breakeven for 4orth division as it ramps up, start-up costs for second Din Tai Fung in London and poor performance of China Bakeries weighing on earnings growth going forward. Meanwhile, Food Atrium is outperforming bakery, restaurant and 4orth divisions on the operating profit level, driving earnings growth and margin expansion.
  • The stock is now fairly valued with a core forward PE of 20.3x for its F&B business, in line with Singapore-listed F&B peers’ average. We believe growth prospects are priced in at this level. Our FY19-20F earnings estimates are also reduced by 6% each to factor in longer EBIT breakeven for 4orth division.

Where We Differ:

  • Our earnings forecasts are below consensus in FY20F as we factor in a longer breakeven period for newly established 4orth division. As the division is in its infancy with only 12 outlets, there is more scope to increase store count, which will lengthen the division’s EBIT breakeven period upon ramping up.
  • Over the long term however, this unit should be capable of delivering similar margins to the company's restaurant division.

Potential catalyst.


  • Our Target Price of S$0.92 is derived from a sum-of-parts (SOTP) valuation.
  • On a per share basis, we value its retail business at S$0.63 on 22x FY19F PE, investment properties at S$0.34 based on market value, and net debt at S$0.05.

Key Risks to Our View:

  • Operational risks include food safety and licences as well as negative publicity. In extreme cases, food operating licences can be revoked for lapse in food safety procedures. Negative publicity may lead to weaker demand and poorer marketability when selling its franchises as the public and franchisees would shy away from their association with BreadTalk.

WHAT’S NEW - FY18 results as expected

FY18 core profit in line:

  • BreadTalk's FY18 profit before tax was S$31.1m (-24% y-o-y), in line with our estimates. Excluding one-offs, PBT declined by just 2% y-o-y at S$32.3m. Headline net profit however exceeded our expectations at S$15.2m (-30% y-o-y) due to better-than-expected minority interests and one-off gains, partially offset by higher income taxes.
  • Revenue came in at S$609.8m (+3% y-o-y), led by growth in Food Atrium division (S$156.9m, +11.4% y-o-y) and 4orth division (S$14.2m, +80.3% y-o-y), within estimates.

Revenue led by Restaurants, Food Atrium and 4orth divisions:

  • Restaurant sales rose 8.2% y-o-y to S$152.3m, while bakery sales declined 5% y-o-y to S$282m on reduction in outlets. 4orth division’s increase was led by 7 new outlets of the 12 outlets, comprising 5 Sō Ramen, 1 TaiGai and 1 Nayuki outlets in Singapore, 4 Song Fa Bak Kut Teh and 1 Wu Pao Chun Bakery outlet in China. Operating profit was S$40.2m (+12% y-o-y), largely driven by S$16.6m (+86.3% y-o-y) from Food Atrium.
  • Restaurant and bakery operating profit declined to S$22.2m (-9% y-o-y) and S$6.5m (-31.4% y-o-y) respectively.

EBIT margins improved driven by Food Atrium division:

  • Gross margins were within expectations at 56.3%, +0.7ppt due to centralised procurement efforts.
  • EBIT margin grew from 5.9% to 6.6% as a result of cost leverage from better performance of Beijing, Xi’an, Thailand and Singapore foodcourts (10.6%, +4.6ppts). This is despite some drag from lower EBIT margins for Bakery (2.3%, -0.9ppt), Restaurants (14.6%, -2.8ppts), and 4orth divisions, which declined on sluggish performance at China bakeries, start-up costs on the opening of Din Tai Fung London, and wider operating losses from the launch of new 4orth concept stores in Nayuki, TaiGai, and Wu Pao Chun Bakery stores respectively.
  • Pre-tax margin excluding one-offs remained relatively stable at 5.3%.

DPS below estimates:

  • A Final DPS of 1 Sct has been declared, similar to last year’s. In addition, a Special DPS of 1.5 Scts was declared last year, attributed to the sale of property. There is no Special DPS this year.
  • Full-year DPS is 1.5 Scts vs post-stock split DPS of 3 Scts last year.

Food Atrium drives operating profit growth:

  • This set of results is largely mixed, in our view, with operating profit growth driven by Food Atrium division, offset by operating profit decline at the other divisions (Bakery, 4orth, and Restaurants).
  • Start-up costs in London’s Din Tai Fung and new brands at 4orth division have led to their respective divisions’ operating profit decline, while bakery has seen lower store count, revenue and earnings decline from weak performance and profitability in China.

Factoring in continued longer breakeven at 4orth division:

  • Headline operating profit has been largely in line. However, there was a larger-than-anticipated operating loss at 4orth Division from the opening of new concept stores. Nayuki, TaiGai, and Wu Pao Chun Bakery stores were only opened in 2018 and remain unprofitable. This leads us to believe that breakeven for 4orth division would take longer than previously anticipated. But over the long term, this unit should be capable of delivering similar margins to the company's restaurant division.
  • As we factor in more prolonged breakeven in operating profit, our earnings for FY19-20F are also brought down by a marginal 6% each.

Mixed outlook, maintain HOLD, lower Target Price of S$0.92.

  • Earnings drivers remain mixed. Management is addressing the Bakery’s poor performance in China, having changed the division’s key management team and dedicating more attention to turn around the bakeries in China.
  • In addition, we anticipate some start-up costs in London for the second Din Tai Fung restaurant (at Tottenham Court Road, Centre Point) scheduled to open in 3Q19) besides accounting for higher operating losses in the 4orth division.

Alfie YEO DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2019-02-20
SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.92 DOWN 0.980