BreadTalk Group Ltd - DBS Research 2019-09-02: BreadTalk Buys Food Junction

BREADTALK GROUP LIMITED (SGX:CTN)

BreadTalk Group Ltd - BreadTalk Buys Food Junction

S$80m deal will consolidate BreadTalk’s position as the third largest foodcourt player in Singapore with 26 outlets.
Deal translates into 6.5x historical book vs Koufu at < 4x P/BV.
Food Junction incurred S$1.7m loss in FY18 with 1H19 earnings of only S$3,183.
Neutral on the deal, as market share and operational scale are outweighed by interest cost.

BREADTALK GROUP LIMITED (SGX:CTN) announced this morning that it is buying 100% of Food Junction Management Pte Ltd (Food Junction) for S$80m. Key sellers are Auric Pacific Group (SGX:A23) and Lippo which own close to all of Food Junction at 98.1%.
Food Junction owns 12 foodcourts in Singapore and three in Malaysia with one more opening next year in Mid Valley Southkey, Johor Bahru.
BreadTalk has 14 foodcourts in Singapore and two in Malaysia. This will consolidate BreadTalk’s position as the third largest foodcourt operator in Singapore, behind NTUC Foodfare/Kopitiam (10+52) and Koufu (47).

PE valuation is not meaningful given that Food Junction incurred a loss in FY18 and 1H19’s earnings was small. NTA is at S$12.3m implying price-to-book of 6.5x, relative to Koufu’s < 4x P/BV. BreadTalk will draw down an additional debt of c.S$50m to finance this deal.

With NTUC Foodfare buying Kopitiam (2018), Broadway buying S-11 (2018), and now BreadTalk buying Food Junction, the market for chained foodcourts and coffeeshops is indeed consolidating. Larger F&B firms continue to seek market share and expansion in this space by taking out smaller players.
Although earnings are not accretive, this acquisition allows BreadTalk to strengthen its market share and store network in the foodcourt segment to better compete with the top 2 players. There could be some EPS drag in the short term, but once it is able to get the loss-making foodcourts into profitability, contribution to the group will be positive.
Note that a foodcourt is a high fixed-cost business. Once revenue exceeds those fixed costs, there is high-margin potential.

We continue to like Koufu (SGX:VL6) which is a BUY (see report: Koufu Group Ltd - Foodcourts Driving Growth), while BreadTalk is currently a HOLD.
We believe interest costs for more loans is likely to weigh on BreadTalk’s earnings going forward.

Alfie YEO DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2019-09-02

SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.920 SAME 0.920