Simons Trading Research

Author: simonsg   |   Latest post: Thu, 21 Nov 2019, 9:35 AM


BreadTalk Group Ltd - Hit by Din Tai Fung London Expenses

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  • 3Q18 earnings below estimates on higher than expected opex for Din Tai Fung London.
  • Mixed performance from bakery business with restructuring still ongoing.
  • Cut FY19-20F earnings by 12-13%.
  • Maintain HOLD, Target Price S$0.98.

Maintain HOLD, With Lower Target Price of S$0.98

  • We maintain our NEUTRAL stance on BreadTalk as we turn more conservative on earnings going forward.
  • We cut our FY19-20F earnings estimates for a more moderate growth outlook from higher-than-expected operating cost structure for the opening of Din Tai Fung UK and slower-than-expected turnaround of its bakery business.
  • The stock now trades at 30.0x FY19F PE, around the average of its past four years’ mean PE valuation.
  • We see earnings growth, albeit slower, driven by a better mix of higher margin food atrium and restaurant businesses.

Where We Differ

  • Our earnings forecasts are below consensus as we factor in higher interest costs from increased borrowings in FY18F and a higher opex outlook.
  • BreadTalk has increased its loans this year ahead of interest rate to increase cash holdings for future capex and other plans. We have factored in higher interest cost in our earnings forecast in addition to higher startup costs for Din Tai Fung UK.

Potential Catalyst

  • We see potential for special dividends if Perennial sells AXA Tower. BreadTalk could pay 4.5 Scts in special dividend upon the sale of AXA Tower based on our estimates.

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

3Q18 below estimates on higher opex:

  • BreadTalk reported 3Q18 earnings of S$2.7m (-32.2% y-o-y), below expectations on higher-than-expected opex and lower operating margins.
  • Group revenue came in at S$158m (+2.2% y-o-y) with headline gross profit margin at 56.5%, both of which were in line with expectations.

Revenue in line with drag from Bakery offset by decent Restaurants and Food Atrium performances:

  • Revenue growth of +2.2% y-o-y was largely led by Restaurants (+10% y-o-y, S$38.7m), Food Atrium (+5% y-o-y, S$40.9m) and 4orth division (+115% y-o-y, S$3.9m). Bakery declined by 5.2% y-o-y to S$73m due to lower revenue from direct operated stores in Shanghai, Beijing and Hong Kong, as well as lower franchise revenue from China, mitigated by stronger revenue from direct operated stores in Singapore and higher international franchise revenue.
  • The addition of two new Din Tai Fung outlets in Singapore and Thailand contributed to the 10% revenue growth of the Restaurant division. Food Atrium’s growth was driven by positive same store sales growth (undisclosed) and two new outlets in Shenzhen and Hong Kong, offset by one closure in Hangzhou.

Higher-than-expected opex a drag on EBIT and operating margins:

  • Headline operating profit dropped by 9% y-o-y to S$9.45m, affected by one-off pre-opening expenses for Din Tai Fung London.
  • While the operating profit of Bakery and Food Atrium grew by a combined 41% y-o-y to S$7.4m, the operating profit for Restaurant Division was reduced to S$5m (-26% y-o-y), attributed to expenses for the new London outlet.
  • The reduction in non-performing Bakery stores led to better operating margins, as with Food Atrium which also saw better margins on better operating leverage.

Higher interest cost and lower JV/associate contribution:

  • Borrowings increased slightly from S$221m in 2Q18 to S$236m this quarter. Net interest costs were much higher at S$1.9m due to additional loans taken up in 2Q18 to beef up cash balances ahead of rising interest rates.
  • JV/associates losses stood at S$0.3m, lower than expected, affected by the performances of Jumbo China, Carl’s Jr Shanghai and BreadTalk-Minor Thailand.

London Din Tai Fung a drag, anticipate more expenses in the coming quarter:

  • Both the Bakery and Food Atrium divisions are performing according to expectations. The closure of non-performing Bakery outlets has yielded lower revenue but better operating margins, while Food Atrium has shown growth in both revenue and operating profit.
  • This quarter’s drag came mainly from the drag of pre-opening expenses from the Din Tai Fung London outlet. With opening slated for 4Q18, we expect to see more of such expenses in the coming quarter but to a lesser extent, as most of the pre-opening costs for London have been incurred in 3Q18.

Cut FY19-20F earnings by 12-13%:

  • We lower our FY18F earnings by 26% to reflect the current 3Q18’s disappointing numbers into our forecast. In addition of factoring in higher-than-expected opex for 3Q18, we have also factored in more pre-opening expenses into 4Q18, which led to our earnings cut.
  • Our growth rate for FY19F/20F is also lowered slightly from 15%/8% to 13%/7% in anticipation of its second restaurant in the pipeline at Centre Point Building on Tottenham Court Road in central London. This results in an earnings reduction of 12-13% for FY19-20F as well.

Maintain HOLD, Lower Target Price to S$0.98

  • Our Target Price of S$0.98 is derived from a sum-of-parts (SOTP) valuation.
  • On a per share basis, we value its retail business at S$0.68 on 22x FY19F PE, investment properties at S$0.34 based on market value, and net debt at S$0.047 per share.
  • Maintain HOLD on limited upside.

Source: DBS Research - 07 Nov 2018

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