Simons Trading Research

Author: simonsg   |   Latest post: Wed, 13 Nov 2019, 11:56 AM


BreadTalk - An Expensive Bread to Eat

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  • Maintain SELL with lower Target Price of SGD0.75 from SGD1.00, 19% downside plus 2% FY19F yield.
  • BreadTalk's 3Q18 PATMI of SGD2.7m (-29% y-o-y) was below our expectation. Although 3Q18 revenue grew 2.3%, EBITDA was flattish due to higher start-up cost from new F&B concepts and new store openings. Higher interest expense and poorer performances from JV and associates dragged down overall earnings.
  • We believe the stock is overvalued as the group would need more time for the new stores to ramp up.

Muted Topline Growth

  • Despite the opening of new food & beverage (F&B) concepts like Taigai, Song Fa and Unayu, revenue growth was dragged down by the closure of directly-owned and franchised BreadTalk outlets in the last twelve months.
  • Moving into 4Q18, BreadTalk group would be opening its first Din Tai Fung in London, a Wu Pao Chun outlet in Shanghai and a Song Fa outlet in Beijing.
  • We believe the soft revenue trend should continue till 1Q19 before the number of stores normalise and sales from its new F&B concepts pick up.

No Growth in EBITDA

  • Both bakery and food atrium segments saw y-o-y and q-o-q improvement in EBITDA margins in 3Q18.
  • Compared to 3Q18, the bakery segment saw an increase in the number of franchisees that generate higher margins, while food atrium margins were held up by higher revenue and low vacancy rate. However, 3Q18 EBITDA remained flattish as margin improvements in the two segments were offset by losses from the new F&B brands under the 4orth division as well as start-up expenses for the opening of its UK Din Tai Fung in 4Q18.

Weak Earnings on Higher Interest Cost

  • BreadTalk Group's 3Q18 PATMI fell 29% y-o-y largely due to rising interest expense. Interest expense surged > 100% y-o-y to SGD2.4m, on the back of increased borrowings and rising interest rates.
  • BreadTalk group issued an SGD100m 4% medium term note early this year in anticipation of the capex requirement, with the plans for a China central production facility underway. We believe the group’s new businesses would need some time to mature before it can absorb this rising interest cost.

Maintain SELL With Lower Target Price of SGD0.75

  • Given the gestation of new businesses and higher interest costs, we cut our FY18F-20F earnings by 30% pa. We also lower our target EV/EBITDA for the core business from 7x to 5.5x in our SOP valuation to account for a slower growth in EBITDA. This lowers our Target Price to SGD0.75.
  • We believe BreadTalk's share price is currently overvalued, given that the stock trades at 39x FY19F P/E ex. properties investments value, compared to its peers, which are trading at an average of 20x.

Source: RHB Invest Research - 07 Nov 2018

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