BreadTalk Group Ltd - DBS Research 2019-08-02: Drag From Bakery & Start-up Losses

BREADTALK GROUP LIMITED (SGX:CTN)

BreadTalk Group Ltd - Drag From Bakery & Start-up Losses

BREADTALK GROUP LIMITED (SGX:CTN)'s 2Q19 earnings below estimates, dragged by losses in bakery and 4orth division.
Interim DPS of 0.5 Scts declared.
Cut FY19-20F earnings by 18-19%.
Maintain HOLD, Target Price lowered to S$0.77.

We remain neutral on BREADTALK GROUP LIMITED (SGX:CTN). The weak bakery performance in China in the current quarter, along with wider than expected start-up losses from 4orth division led us to reduce our FY19-20F earnings by 18-19%.
While we expect modest EBIT growth led by Restaurant and Food Atrium divisions, higher interest costs due to SFRS (I) 16 will be a drag on earnings from FY19F.
The stock is fairly valued trading at 19.5x PE for its core F&B business, in line with Singapore-listed F&B peers’ average.

Our earnings forecasts are below consensus as we factor in a longer breakeven period for the new 4orth division. The division is in its infancy with scope to increase store count, that will lengthen the division’s EBIT breakeven period. This unit should be capable of delivering similar margins to the restaurant division in the long term.

We see potential for a special dividend of up to 4.55Scts if Perennial sells AXA Tower.

BreadTalk's 2Q19 headline net profit of S$1m (-57.9% y-o-y) trailed our estimates. Revenue grew 9.8% y-o-y to S$163m with operating profit declining by 10.3% y-o-y to S$10.2m.
Revenue growth was across all segments, particularly Restaurant (+18% y-o-y, S$44m) and 4orth (+158%, S$7.8m) divisions while Bakery (+3%, S$70.8m) and Food Atrium (+2%, S$39.6m) grew by a smaller extent.
The drag on net profit was from losses before tax in the Bakery division (- S$1.9m vs S$1.5m profit before tax in 2Q18) and larger losses before tax of S$3.2m at the 4orth division vs S$0.2m loss in 2Q18.
An interim dividend of 0.5 Scts was declared, unchanged from 2Q18, and in line with expectations.

The Bakery division posted losses before tax of S$1.9m on the back of weaker revenue (from a S$1.5m profit before tax in 2Q18), dragged by China, offset by stronger performance in Singapore.
Revenue growth of 3% y-o-y was only achieved through the acquisition of 50% interest in BTM (Thailand) Ltd from Minor Food Group. There was a net store count increase of 33 to 875 stores partly due to the consolidation of Thailand’s 50 outlets. There was a decline in franchised stores in line with the rationalisation of franchisees.
While headline revenue increased, higher operating costs led to an operating loss of S$0.8m compared to S$1.8m operating profit in 2Q18.

Food Atrium division turned in a decent performance, with profit before tax growing by 13% y-o-y to S$4.2m. Three new “Sergeant kitchens” in Bangkok, Hong Kong and Shanghai and strong same store sales growth (SSSG) in North China, East China and Hong Kong helped to fuel revenue growth. Stall occupancy also remained high.

There was a sequential doubling of operating profit to S$8.3m in 2Q19 as 2 new Singapore outlets (Jewel and Marina Bay Sands) were added. This is in addition to Thailand’s Terminal 21 and Singapore’s Great World City outlets which opened in 1Q19. However, 1H19’s operating profit was flat compared to 1H18 with 1H19 profit before tax trailing 13% y-o-y at S$11.5m.
A new outlet in London has yet to turn profitable, while Singapore operations are facing slight margin pressure, accounting for the overall drag in profit before tax in 1H19.

Losses widened to S$3.2m PBT from S$0.2m loss last year and S$2.3m loss in 1Q19 due to an increase in number of outlets and start-up costs. There are now 21 outlets, 7 new outlets from 1Q19 and 13 new outlets since last year.

BreadTalk's 1H19 earnings trailed our previous estimates following earnings drag from the bakery division and start-up losses from the 4orth division. The impact of higher interest rates from accounting of leases under SFRS (I) 16 has not helped reported earnings either.
Going forward, we impute higher interest rates due to the new lease accounting as well.

Our SOTP Target Price is now lower at S$0.77 based on S$0.54 for the core F&B business valued at 22x blended FY19-20F EPS, investment properties at S$0.33 based on market value, and net debt at S$0.10.
BreadTalk is now valued fairly at 19.5x for its core F&B business, in line with Singapore-listed F&B peer average.
Upside for the stock remains limited.
Maintain HOLD.

Alfie YEO DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2019-08-02

SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.77 DOWN 0.920