BreadTalk - RHB Invest 2019-08-05: A Stale Bread; Try Again Later


BreadTalk - A Stale Bread; Try Again Later

  • Maintain NEUTRAL with lower SOP-based Target Price of SGD0.71 from SGD0.81, implying 3% upside with 2% yield.
  • BREADTALK (SGX:CTN)'s 2Q19 results were below expectations. 2Q19 PATMI was down 58% y-o-y to SGD1.0m, dragged by weak bakery operations and start-up costs at the 4orth division. As a result, we cut our FY19F-21F earnings by 14%/12%/7%, and derive a lower Target Price of SGD0.71.
  • Short-term catalyst is the sale of its stake in AXA tower.

Bakery segment swung into the red in 2Q19.

  • The bakery division incurred losses of SGD1.9m in 2Q19, down SGD3.4m y-o-y. This was largely attributed to the consolidation of the loss-making Thailand bakery business following the acquisition of a 50% interest in BTM (Thailand) from Minor Group.
  • In addition, the China operations remained weak. The rationalisation of China franchisees over the last 12 months has reduced franchise earnings.

Losses from the 4orth division widened

  • Losses from the 4orth division widened q-o-q and y-o-y, due to new store openings. Currently, the division has five brands – So Ramen, Song Fa, Tai Gai, Nayuki and Wu Pao Chun, with So Ramen being the only profitable brand thus far. The number of stores under the 4orth division rose to 21 in 2Q19 from eight in 2Q18.
  • During the results briefing on 2 Aug, management guided that there would be no addition of new brands to the 4orth division for the time being. Instead, it would focus on growing Song Fa outlets in Thailand and four major cities in China where it has the master-franchise rights – we view this positively. Based on management’s previous guidance, Song Fa outlets have a fast breakeven period of about two months. We believe the division would breakeven in 2020 when the number of Song Fa stores reaches critical mass.

Food Atrium continues to hold its weight

  • Food Atrium continues to hold its weight, delivering higher margins in 2Q19 as its pre-tax profit grew 14% y-o-y to SGD4.2m. However, with pre-tax margins at 10.6%, we think margins have more or less peaked for this segment.
  • Further earnings growth would be dependent on new store openings.

Restaurant pre-tax earnings showed y-o-y and q-o-q improvements.

  • Restaurant pre-tax earnings showed y-o-y and q-o-q improvements. This was largely driven by three new Din Tai Fung restaurants in Singapore and one in Thailand that have opened YTD; Din Tai Fung UK is still loss-making.

Need a few more quarters to revive the stale bread.

  • Despite a disappointing set of result, we maintain our NEUTRAL call as we see potential for earnings to recover next year, led by the expected turnaround at its 4orth division and new Din Tai Fung restaurants.

Juliana Cai RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-08-05
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 0.71 DOWN 0.810