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Anonymous

20 Jan 2020

(Stocks Discussion) SGX: BreadTalk Group Limited (SGX: CTN)?

Discuss anything about BreadTalk Group Limited (SGX: CTN) share price, dividends, yield, ratios, fundamentals, technical analysis and if you would buy or sell this stock on the SGX Singapore markets. Also, these questions just represent opinions, so before you invest, please do your own due diligence.

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    Discussion (9)

    What are your thoughts?

    TL;DR: Personally, I don't think it's a good buy, looking at the financials on the surface, and considering that the F&B business is a very tough market both locally and abroad. Anyway, I have collated some pointers here that I picked up from other sources. Hope it helps!

    Source: TODAYonline

    Business Profile

    Most of us would recognise that the namesake bakery outlets but they also have got other businesses. They currently operate and franchise bakery/confectionary outlets, foodcourts and restaurants with 900 outlets over 17 countries. You could split their operations up into** **Bakery, Food Atrium and Restaurant. The bakery has almost 850 outlets, but almost 75% of them are run by franchisees. The Food Atrium segment operates under the chain of food courts under the name Food Republic, with 53 of them operating in SG and China. The restaurant segment operates 27 Din Tai Fung outlets in SG and Thailand.

    Financial figures used are for FY18*

    Profitability

    Source: BreadTalk Group Ltd Annual Report 2018

    The overall profitability of BreadTalk Group is only 3.18%, quite low. Gross Margin is 56.2% while operating margin is 5.12%. The profit margin for the bakery segment is less than 1%, whereas the most profitable segment is actually the restaurant segment is around 20%. Since the bakery segment forms most of the revenue (almost 50%), this has resulted in the low profit margins. This actually shouldn't come as a surprise since prices charged for their bakery products need to be low to compete with other heartland bakeries. Moreover, the bakeries are usually positioned at mall locations with good frontage and high shopping traffic, which usually has very high rent too. For the restaurant segment, they can more easily differentiate themselves and charge more premium prices

    Balance Sheet Strength

    Source: BreadTalk Group Ltd Annual Report 2018

    Compared to its peers, BreadTalk is quite highly leveraged. Based on the latest financials, their current and quick ratio fall below 1. It's capital structure is also made up mainly of debt, with debt being almost 1.5X of equity. It's debt mainly comprises of an equal proportion of short-term and long-term debt. Most of this debt had been taking on to finance overseas expansion, but a saving grace is that they have strong operating cashflows.

    Valuation

    Last Update: 23rd April

    BreadTalk's P/E ratio is currently near 32X. This higher P/E ratio could siginify investor's optimism that BreadTalk's ventures internationally would be positive. However, this valuation seems much higher than other players such as Kimly (13X), Koufu (16X), Jumbo (20X). Not sure if this high valuation for P/E is justified since BreadTalk has been experiencing some growth issues overseas. Personally, I do not think this valuation is justified since F&B market is quite tough overseas also, and value differentiation is still tough.

    As compared with other F&B businesses in Singapore, BreadTalk has the highest P/E and P/B ratio, and yet has the lowest dividend yield. This is quite an interesting phenomenon.

    Based on their financials, I do believe that other players such as Soup Restaurant and Japan Foods Holdings do have a lead on Breadtalk, as well as with Kimly and Koufu. This could be so because of the the weak profitability of the bakery segment. At a much higher P/E ratio, it seems that BreadTalk could be overvalued.

    Share Price Performance

    BreadTalk's last twelve month's performance reflected quite a huge dip since their peek in July, when earnings were released. I would say that most of such changes are due to the performances of their overseas outlet. I suspect that much of the valuation given were from expectations of overseas growth. Over the last 5 years, share prices did make a return of 17%, much better than the STI. With a 52-week high of $1.26, shares are trading at 65% of this high.

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      Some condensed research on Breadtalk's overseas operations which I am quite bullish of:

      A background of the current EBITDA breakdown. This paints a good overall picture behind the main operating drivers of BreadTalk.

      1. Aggressive growth of non-bakery divisions will drive top line earnings. Following initial entry of Din Tai Fung into United Kingdom (4Q18) and an upcoming 2nd store (1H19), management continues to take an expansionary stance for the restaurant business, leveraging on the strong brand name of Din Tai Fung (Top 10 restaurant, New York Times) and new operation concepts (UK branch first to have cocktail bar). Din Tai Fung contributed 25% of group revenue in FY18, up from 23% the previous year and we expect that figure to increase following Breadtalk chairman Mr Quek stating potential opening of 20 restaurants across UK and reinforcement from positive projected yearly growth in UK’s full-service restaurant sales by 2.6%

      2. Food atrium division have seen closures in FY18 for non-profitable areas. We do not expect further store closures into FY19 as remaining stores are contributing positive profits. Given strong growth projection of tier 1 China cities of 6.7% (Figure 10), management intend to add 2-3 food court every year in China, further driving top line earnings.

      3. BreadTalk management looked to structural changes to drive core food margin improvements. In the bakery division, underperforming franchises in china are switched for proven joint venture model, which will drive profitability of the core bakery division. BreakTalk’s exit from Toastbox operations in China seek re-entry with a new branded offering to reposition itself to suit the food habits of the Chinese market.

      We believe these structural changes are likely to bear fruit given BreadTalk management’s past success in rebranding of unprofitable ‘Ramen Play’ to ‘So’, which led to a 12% net margin. Management’s ability and willingness to timely cut unprofitable business and turn them around will ensure long term profitability of new ventures.

      4. Recent Joint Ventures. BreadTalk entered a 66% owned JV with Shinmei Co Ltd. Shinmei will oversee the sourcing, procurement and supply of key raw materials and ingredients to support the F&B operations of BreadTalk’s group of companies globally. Tapping on Shinmei’s expertise, management expects a 1 – 1.5% improved gross profit margin over 2-3 years. Shinmei’s established operations in Japan also provides potential for BreadTalk to break into the Japanese market, which remains a possibility given chairman Mr Quek’s remarks on expansion into new territories, presenting potential for upside.

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        What I understood is their bakery division has very low margins hence they are boosting their restau...

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