ASIAN INSIGHTS VICKERS SECURITIES ed: JS / JC, PY
BUY (Re-instating Coverage) Last Traded Price ( 3 Apr 2017): S$1.36 (STI : 3,187.51) Price Target 12-mth: S$1.69 (25% upside) Potential Catalyst: Earnings turnaround Analyst Alfie YEO +65 6682 3717 [email protected] Andy SIM CFA +65 6682 3718 [email protected]
Price Relative
Forecasts and Valuation FY Dec (S$m) 2015A 2016A 2017F 2018F Revenue 624 615 643 673 EBITDA 80.9 80.0 93.1 97.8 Pre-tax Profit 25.4 29.7 47.2 41.4 Net Profit 7.60 11.4 26.3 23.0 Net Pft (Pre Ex.) 12.2 8.63 17.0 23.0 EPS (S cts) 2.70 4.07 9.34 8.19 EPS Pre Ex. (S cts) 4.33 3.07 6.04 8.19 EPS Gth (%) (66) 50 130 (12) EPS Gth Pre Ex (%) (45) (29) 97 36 Diluted EPS (S cts) 2.69 4.05 9.30 8.15 Net DPS (S cts) 1.50 3.85 2.50 2.50 BV Per Share (S cts) 45.9 46.9 53.8 59.5 PE (X) 50.2 33.3 14.5 16.5 PE Pre Ex. (X) 31.3 44.1 22.5 16.5 P/Cash Flow (X) 5.7 4.3 4.4 4.5 EV/EBITDA (X) 6.2 5.6 4.4 3.9 Net Div Yield (%) 1.1 2.8 1.8 1.8 P/Book Value (X) 3.0 2.9 2.5 2.3 Net Debt/Equity (X) 0.7 0.3 0.0 CASH ROAE (%) 6.0 8.8 18.6 14.5 Consensus EPS (S cts): 5.90 7.90 Other Broker Recs: B: 2 S: 0 H: 1 ICB Industry : Consumer Services ICB Sector: Food & Drug Retailers Principal Business: BreadTalk is engaged in the operations and franchising of bakery outlets, restaurants and food atrias.
Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.
DBS Group Research . Equity 4 Apr 2017
Singapore Company Guide
BreadTalk Group Ltd Bloomberg: BREAD SP | Reuters: BRET.SI Refer to important disclosures at the end of this report
Piping hot bread in the making
We see earnings recovering led by Foodcourt
business which has turned around in 4Q16
Bakery’s cost rationalisation & better Din Tai Fung
sales mix will support operating margin expansion
Project 3-year CAGR growth of 63% for FY16-FY18F
Re-instating coverage with BUY and SOTP-based TP
of S$1.69 backed by investment properties worth
S$0.43 per share
Foodcourt earnings has turned around in 4Q16 and
poised for growth. BreadTalk is poised for earnings growth this year. After dismal performances in FY15 and 1H16, we saw a turnaround in 2H16 earnings. Its cost saving initiatives led to margin improvements and we saw a recovery of its Foodcourt business through outlet rationalisation in China. We see earnings recovery momentum spilling over to FY17F. All three business segments are now better positioned for earnings growth. We forecast core earnings CAGR of 63% for FY16-FY18F on the back of earnings recovery and a low base. Turnaround of its Foodcourt business in China, better Bakery cost efficiencies, and outlet expansion of high margin Din Tai Fung restaurants will collectively drive earnings growth in the medium term. BreadTalk’s valuation based on its core business (ex-property investments) is compelling at 18x FY17F PE. Share price backed by property investments worth
S$0.43 per share. The valuation of BreadTalk’s property investments based on current market value implies an upside of 3% over their book value. BreadTalk has a track record of monetising its property investments (111 Somerset and 112 Katong). Successful sale of property investments above market valuation is a possible share price catalyst. Reinstate coverage with BUY and S$1.69 TP based on
SOTP. We value BreadTalk’s core retail business at S$1.33 per share pegged to 22x PE, in line with peers. Together with property investments and net debt, BreadTalk’s TP is S$1.69, offering 25% upside. Reinstating coverage with a BUY recommendation
At A Glance Issued Capital (m shrs) 281 Mkt. Cap (S$m/US$m) 381 / 273 Major Shareholders (%) Meng Tong Quek 34.0 Lih Leng Lee 18.6 Primary Investment 14.0
Free Float (%) 27.4 3m Avg. Daily Val (US$m) 0.21
85
105
125
145
165
185
205
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
Mar-13 Mar-14 Mar-15 Mar-16 Mar-17
Relative IndexS$
Breadtalk Group Ltd (LHS) Relative STI (RHS)
ASIAN INSIGHTS VICKERS SECURITIES Page 2
Company Guide
BreadTalk Group Ltd
INVESTMENT THESIS
Profile Rationale
BreadTalk Group is a Singapore-based food and beverage (F&B) group engaged in the operations and franchising of bakery/confectionery outlets, food courts and restaurants across the region. BreadTalk’s portfolio currently has six brands – BreadTalk, ToastBox, Food Republic, Ramen Play, San Pou Tei and Din Tai Fung. It operates over 900 outlets across 17 countries.
We reinstate our coverage of BreadTalk with a Buy recommendation and S$1.69 TP based on SOTP. BreadTalk’s business is turning around with closure of non-performing Foodcourts in China, better sales mix at its restaurants, and cost rationalisation at its bakeries. These are set to lift margins and improve earnings quality. Our TP is backed by S$0.43 per share worth of investment properties, with core earnings valued at 18x FY17 PE.
Valuation Risks
Our TP of S$1.69 is derived from a sum-of-parts (SOTP) valuation. On a per share basis, we value its retail business at 22x FY17F PE at S$1.33, investment properties at S$0.43 based on market value, net debt at -S$0.07 per share.
Food safety and licences. As a restaurant operator, it is important to maintain food safety. Lapses would lead to reputational risks and in extreme cases, food operation licences could be revoked. Negative publicity affects consumer confidence and the marketability of its franchise. BreadTalk has had some negative publicity, especially in 2015 over food safety and food preparation procedures in Singapore and China. Incidences such as these can generate negative responses from the public which can potentially affect sales as well as the marketability of its franchise overseas.
Source: DBS Bank
ASIAN INSIGHTS VICKERS SECURITIES Page 3
Company Guide
BreadTalk Group Ltd
SWOT Analysis
Strengths Weakness
Brand owner model. BreadTalk owns the BreadTalk brand and has a franchise business model that franchises out the brand to third party franchisees. This offers scalable expansion and BreadTalk has control over franchisees. Strong network across Asia. BreadTalk has established a strong presence across Asia. It has over 400 outlets in China alone and is also present in Hong Kong and Taiwan. Its relationships with landlords and franchisees allow the business to scale and grow quickly. Multibrand, multiformat portfolio. BreadTalk has various brands and formats including BreadTalk and Toastbox for Bakery, Din Tai Fung (as a franchisee) and Ramen Play for Restaurants, Food Republic for Foodcourt. These allow BreadTalk to grow using various penetration and multibrand strategies to expand into malls, which also facilitates its collective bargaining power with landlords over rents as well. Innovation. BreadTalk innovates to stay ahead of the competition. There are 50-60 new products and seasonal items to be launched in stages in the pipeline, which help to increase average cheque size and to drive more traffic into its bakery shops. Cash-generative business. BreadTalk’s business generates operating cashflows of around S$65-90m annually. Working capital generally positive with cash collection at 35 days, payables at 144 days and inventory at 16 days.
Competition. There are many mid-range foodservice restaurants players in Singapore, each offering their own unique concepts. Direct and indirect competitors are chain casual-dining full-service F&B/restaurant groups such as Creative Eateries, Japan Foods, RE&S Enterprises, Katrina, Minor Food Group, Sakae Holdings, ABR Holdings, etc. Competitors in the Foodcourt space are Kopitiam, S-11, Koufu and competitors for bakery include Bengawan Solo and Prima Deli. Reputational risk. BreadTalk is one of the biggest brands in Singapore with Euromonitor ranking it as the number one player in Food/Drink/Tobacco specialist in Singapore. The brand is also known regionally in North Asia and South East Asia. Reputational risk is at stake if consumers take to social media for any operational lapses or negative issues. F&B business has low entry barriers. F&B foodservice businesses have low entry barriers. However, BreadTalk’s strong branding and economies of scale make it difficult for new and smaller entrants to compete on cost and profitability.
Opportunities Threats
Well positioned to capitalise on growing food consumption in Asia. According to Euromonitor, the market size for Food/Drink/Tobacco specialist retailers in Singapore and China is expect to grow at a CAGR of 1.7%-3.5% over the next 5 years. BreadTalk as a leading bakery retailer in Singapore and regionally is well positioned to capture the growing demand in the region. Relationship with landlords. Partnership with retail mall landlords to introduce food retail concept themes, will further entrench its position and raise barriers to entry in addition to collective bargaining of rents for all of its brands. More opportunities to expand in China. BreadTalk has a strong presence in China with 44% of stores located there. Going forward, the focus is to increase franchised bakery outlets faster than expanding self-operated own stores. Hence, there is more scope to increase store count in China.
Negative publicity. Negative publicity could affect BreadTalk’s demand and support from its regular customers. In the past, BreadTalk had been alleged that it had not changed its doughnut frying oil for years in Shenzhen. In Singapore, it also drew negative response on social media in 2015 for promoting buns commemorating Mr Lee Kuan Yew after his death in addition to marketing soya bean milk from commercially available sources as freshly prepared. Food safety and operating licence. The F&B business is licensed in Singapore by the National Environment Agency. Food safety and hygiene standards must be met. In extreme cases of non-compliance, licences could be revoked. May be affected by disease outbreaks and poor weather. Business could slow during a health crisis or poor weather such as haze. During Singapore’s haze in October 2015, businesses were disrupted as consumers hid indoors. The Singapore government estimated that the haze had resulted in economic losses of about S$700m.
Source: DBS Bank
ASIAN INSIGHTS VICKERS SECURITIES Page 4
Company Guide
BreadTalk Group Ltd
Company Background Singapore-based regional F&B restaurant brand owner and operator. BreadTalk Group is a Singapore-based food and beverage (F&B) group engaged in the operations and franchising of bakery/confectionery outlets, food courts and restaurants across the region. BreadTalk was listed on the SGX in 2003 and is today a regional F&B group which operates and franchises a total of 951 outlets. BreadTalk’s portfolio currently has 6 brands – BreadTalk, ToastBox, Food Republic, Ramen Play, San Pou Tei and Din Tai Fung. Outlet distribution by brand FY16
Source: Company, DBS Bank 951 outlets under the group. BreadTalk operates and manages 862 owned and franchised bakeries, 32 Din Tai Fung, Ramen Play and Sou Pou Tei restaurants in Singapore and Thailand, as well as 57 Food Republic food atria in China, Singapore, Hong Kong, Malaysia, Taiwan and Thailand. BreadTalk currently operates c.260 bakery outlets directly in addition to c.600 franchise outlets regionally. Outlet distribution by country FY16
Source: Company, DBS Bank A retail operator and franchisor of its own brands, and franchisee to other brands. BreadTalk operates in the consumer foodservice space and operates retail outlets for bakery products, Foodcourts and restaurants. Its retail operations comprise of a mix of 1) self-operated outlets for its own brands; 2) a retail operator as a franchisee for Din Tai Fung restaurants; and 3) a franchisor of its own brands such as BreadTalk to third party retail operators.
Revenue by business segment FY16
Source: Company, DBS Bank Innovative food concepts, streamlined to focus on next stage of growth. The Group has been in the forefront of food concepts and innovation, having introduced the boutique bakery concept in 2000. It was also the first to introduce the thematic food atrium where consumers are able to experience quality local food fare in a food court location. In 2010, it undertook a major review and organised the Group into three divisions – Bakery, Restaurant and Food Atrium, to pave the way for future growth. BreadTalk created its flagship pork floss bun in 2000, which remains one of its best-seller till today. Revenue mainly from Singapore and China bakery business. A majority of BreadTalk’s revenue is derived from the bakery business and in Singapore and China. The bakery business comprising of BreadTalk and Toastbox contributed 50% of Group revenue in for FY16 and has the most number of outlets across the three formats, with significant concentration in Singapore and China. Revenue by geography FY16
Source: Company, DBS Bank
Breadtalk and toastbox, 862,
91%
Food Republic, 57, 6%
Din Tai Fung, 24, 2%
San Pou Tei, 2, 0%
RamenPlay, 6, 1%
China, 423, 44%
Others, 355, 37%
Singapore, 167, 18%
Thailand, 6, 1%
Singapore55%
China28%
Hong Kong11%
Others6%
Bakery50%
Restaurant24%
Food court26%
ASIAN INSIGHTS VICKERS SECURITIES Page 5
Company Guide
BreadTalk Group Ltd
Owns 30% equity stake in a JV with Jumbo Group to operate Jumbo Seafood outlets in Shanghai. BreadTalk owns 30% in a JV with Jumbo Group to operate seafood restaurants in Shanghai, China. As BreadTalk’s Chairman and Founder Mr George Quek has extensive experience in operating in China, the collaboration with Jumbo leverages on BreadTalk’s operating and retail experience there to source for new and suitable locations for Jumbo Seafood restaurants. The JV is limited to the Huadong area (华东区 – defined by the provinces of Shandong, Jiangsu, Anhui, Zhejiang, Jiangxi, Fujian and Shanghai) and the opening and operation of the Jumbo Seafood restaurant brand only. Results for the JV are recognised in share of results in associates. Other associates include Carl’s Jr China and CHIJMES. Cost Breakdown FY16
Source: Company, DBS Bank estimates Cost of Goods Sold (COGS), rents and staff costs make up over 80% of total costs. We estimate that COGS make up approximately 22% of total costs, with rents and staff costs each making up approximately 30% of total expenses. COGS comprise mainly of food inputs such as flour, wheat, oil etc. for Bakery and Restaurants. Depreciation is mainly renovation for Foodcourts, Bakery and to a smaller extent Restaurants, and is charged over a period of 2-6 years.
Property investments in Singapore and China worth S$130m. BreadTalk holds some property investments on its books in the form of investment securities. Key properties are mainly AXA Tower, CHIJMES, 111 Somerset (sold in 1Q17), Beijing Tongzhou and a property located in Shanghai Luidi. AXA Tower, CHIJMES, 111 Somerset and Beijing Tongzhou are investments made in collaboration with Perennial. Shares in CHIJMES are revalued under associates on the balance sheet, while investments held at cost on the balance sheet reflect CHIJMES bonds, AXA Tower’s shares and bonds, and Beijing Tongzhou shares. BreadTalk also owns the BreadTalk IHQ land on a leasehold basis for 30 years from 1 February 2010. The IHQ which opened in 2013 houses its corporate office, research and development laboratories, training academy, warehousing facilities and central kitchen operations. Owns a 29% stake in CHIJMES
Source: Perennial Real Estate, Company, DBS Bank Potential for properties to be sold. Perennial has a good track record of selling properties. It previously sold 112 Katong in 1Q16 and 111 Somerset in 1Q17 in which BreadTalk booked accounting gains of S$8.5m and S$9.3m respectively. Potential sale of stakes in AXA Tower (5.31%), CHIJMES (29%) and Beijing Tongzhou in the future would provide additional catalysts for the stock. Investment properties sold
Properties Sold Cost Selling
price
Accounting
Gain
112 Katong 1Q16 S$7.5m S$16m S$8.5m
111 Somerset 1Q17 S$17.2m S$26.5m S$9.3m
Source: Company, DBS Bank
29% 51.61% 19.39%
100%
100%
Perennial Real Estate
Breadtalk Others
Perennial (CHIJ MES) Pte
Ltd
Pre 8 Inv estment s
Pte Ltd
CHIJ MES
ASIAN INSIGHTS VICKERS SECURITIES Page 6
Company Guide
BreadTalk Group Ltd
Value of property investments on BreadTalk’s books (excluding 111 Somerset sold in 1Q17)
Securities Bonds Shares Cost Valuation Accounting classification
AXA Tower (5.31%) S$8.496m S$10.875m S$19.4m S$23m Investment securities at cost
CHIJMES (29%) S$18m S$22.685m S$18m S$41m Bonds as investment securities at cost,
Shares as associates revalued at market
Beijing Tongzhou Integrated Dev’t n/a S$34m S$34m S$34m Equity instruments (unquoted) at cost
Shanghai Luidi Investment property n/a S$23m S$23m S$23m Investment property revalued at market
Total S$94.4m S$121m
Source: Company, DBS Bank Operates a total of 951 owned and franchised outlets
Division Bakery Food atrium Restaurant
Brand BreadTalk & Toastbox Food Republic Din Tai Fung Ramen Play San Pou Tei Total
Singapore 123 15 21 6 2 167
Hong Kong 24 5 - - - 29
China 394 29 - - - 423
Rest of the world 321 8 3 - - 332
Total 862 57 24 6 2 951
Source: Company, DBS Bank
Sales Trend Profitability Trend
Source: Company, DBS Bank
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
0
100
200
300
400
500
600
700
2014A 2015A 2016A 2017F 2018F
S$ m
Total Revenue Revenue Growth (%) (YoY)
7
12
17
22
27
32
37
42
47
2014A 2015A 2016A 2017F 2018F
S$ m
Operating EBIT Pre tax Profit Net Profit
ASIAN INSIGHTS VICKERS SECURITIES Page 7
Company Guide
BreadTalk Group Ltd
Competitive Strengths Franchisor brand owner model for most of the brands it operates Brand owner - has control over its own brands. BreadTalk is a F&B brand owner of the BreadTalk, Food Republic, Ramen Play and San Pou Tei brands. Being a brand owner allows BreadTalk to have control over the growth and evolvement of the brand and its business. It is able to exercise control over its franchisees on how the brands are represented and operated at franchisee outlets. Likewise, it is not subject to requirements of the franchisor or at risk of franchisor recalling the franchise agreement. Its BreadTalk brand of bakeries has been successful in establishing franchisees across China, which enabled it grow quickly from 342 outlets in FY09 to 951 outlets in FY16. Today, franchisee stores make up 70% or 602 of BreadTalk’s 862 self-operated and franchised bakery stores. Strong franchisee of Din Tai Fung’s restaurants. BreadTalk is also a franchisee of other F&B brands (Michelin Star Din Tai Fung chain of restaurants since 2003). Although a smaller contributor to revenue, its high operating margins (15.4% in FY16) makes this segment a key contributor to operating profit. In FY16, segment operating profit was S$23.2m, forming 66% of group operating profit of S$35.3m. The impressive numbers were generated from just 32 (3.4% of store count, 30 of 951 outlets) out of a total of 951 outlets in FY16. Economies of scale Leading F&B company in Singapore. BreadTalk is one of the largest bakery companies in Singapore. According to Euromonitor, BreadTalk is ranked number one in food/drink/tobacco specialists with 6% market share, ahead of Prima Deli and Bengawan Solo. Brand portfolio provides better bargaining power for rents. BreadTalk’s F&B brands cut across the restaurant, bakery and Foodcourt foodservice sub-segments. Most of these F&B offerings are commonly available in shopping malls. Unlike mono brand companies, it is able to undertake collective negotiations on outlet space with landlords for all its brands. Furthermore, it has presence in many malls and has extensive relationships with developers and landlords. This is also a key reason why Jumbo Group partnered BreadTalk in its China JV for the Huadong area. BreadTalk brands usually collectively take up a decent portion of property space (Foodcourt c.20,000 sqft, bakery c.600-800 sqft, restaurant c.3,000 sqft), enabling it to obtain rents at a competitive rate due to scale. Rental rates will therefore be relatively more competitive than its smaller competitors.
Relationships with landlords and developers provide opportunities for new outlets. With more than 900 outlets across 17 countries, BreadTalk’s strong relationship with developers and landlords puts it in a favourable position to be offered new outlet space in new mall developments. This is because it has the ability to help landlords fill up key F&B spaces quickly with a good mix of restaurants, bakery and Foodcourts. Therefore, BreadTalk will often be one of the first tenants to be offered shop units in new malls by landlords, enabling it to select more strategic shop units in the development. Diversified F&B brand portfolio Multi-brand strategy. BreadTalk is a balanced mix of F&B brands. While these brands can grow together collectively in malls, each of these brands also enables BreadTalk to target different sub-segments of the foodservice market – restaurant for higher end consumers, bakery for staple F&B consumption, Foodcourt for lower end foodservice customers, allowing BreadTalk to reach a larger customer base while capturing the market’s higher marginal propensity to spend on food. Entrenched in China Well positioned to capitalise on demand in China. BreadTalk has been in China for more than 10 years and today has close to 400 bakeries and 30 Foodcourts, contributing close to one-third of revenue and 44% of total store count. It has a presence in tier 1 and 2 cities including Shanghai, Beijing, Tianjin, Chongqing, Xian, Shenzhen, Chengdu. According to Euromonitor, China’s Food/Drink/Tobacco specialist retail space is expected to grow by a CAGR of 1.7% over the next 5 years. Innovative retail and food concepts to capture market Innovation improves customer experience and stickiness. BreadTalk differentiates itself with unique concepts and food products, most notably is flagship pork floss bun. It has an R&D team to innovate new products. There are 50-60 new products and seasonal items to be launched in stages in the pipeline, which help to increase average cheque size and to drive more traffic into its bakery shops. It is also experimenting with digital systems that inform customers when a fresh batch of bread is ready. These initiatives help to improve customer experience and stickiness.
ASIAN INSIGHTS VICKERS SECURITIES Page 8
Company Guide
BreadTalk Group Ltd
Growth Strategies Quality of earnings to improve Less aggressive store expansion to concentrate on yielding higher operating efficiencies. Store count has grown aggressively over the past few years (CAGR of 18% from FY09 to FY16), yet net profit has not grown in similar magnitude due to increase in operating costs including rental, depreciation and staff costs. There is currently a shift in focus to make existing operations more efficient, lower operating costs and expand margins. Therefore, store opening in the next few quarters will not be aggressive. We see FY17F as a year where BreadTalk repositions itself and reorganises its operations internally to become more efficient. Total store count has led by franchise outlets
Source: Company, DBS Bank Expect cost efficiencies and margin improvement. We see margins improving at Group level. The swing to profitability at the Foodcourt business, cost savings initiatives at the bakery and improved sales mix from restaurant business should collectively improve margins. We expect store expansion to take on a more aggressive pace once cost efficiencies and margin improvements are realised in the coming year or two. Bakery division to become more cost efficient Driving margin improvement through cost efficiencies. BreadTalk has already demonstrated that it has the ability to improve cost efficiency as FY16 gross margins had improved to 54.9% y-o-y (+2.0ppts). Initiatives such as better demand planning, more efficient human resource planning, tighter cost controls have helped to benefit operating margins. Better demand planning has led to lower food wastage, while human resource efforts in overtime policies and tighter scheduling of workers especially in the central kitchen have contributed to lower excessive wage payments. It has also been spending less on capex, leading to some moderation in depreciation expenses going forward.
Non-performing legacy franchisees. BreadTalk has been in the process of restructuring its list of franchisees by ending agreements with non-performing franchisees including those with legacy relationships. With this restructuring, we expect to see a stronger franchisee base with less drag from non-performing accounts. Following this portfolio restructuring, it will look to increase franchisee outlets with the stronger remaining partners. As franchise outlets have higher net margins, and lower direct operational risk, there is potential for Bakery margins to increase as well given that franchise revenue is royalty income, recognised a percentage of franchisee sales with minimal costs to BreadTalk. Store increases this year will mostly be franchisee stores in Beijing and Shanghai. We expect margins to increase when mix of franchise stores improve going forward. Food Atrium division has turned profitable in 4Q16 Changes to management personnel, tenant-mix and tentnat quality has turned Foodcourt losses into profitability. Foodcourt is the division that is expected make a marked turnaround in FY17F. FY17F will start on a clean slate post store closures and impairments made in FY16 (S$5-6m). The business had overexpanded into tier 1 and 2 cities in China, with only tier 1 cities’ Foodcourts outperforming tier 2 cities. While Foodcourts in Singapore were profitable, Foodcourts in tier 2 cities in China were a drag. Changes were made to the portfolio in FY16 by closing non-performing outlets especially in tier 3 cities. It also replaced China Foodcourt’s management team with new personnel. There were changes made to tenant quality and tenant mix, which led to an improved performance and occupancy at its China Foodcourts. Foodcourt’s operating profit in 4Q16 had already improved from a loss to a small profit. Store openings this year will include Shenzhen, Guangdong and Shanghai. Restaurants continue to grow New outlet in London this year. BreadTalk currently has 21 Din Tai Fung outlets in Singapore, and 3 in Thailand. It has already planned for a new outlet in London this year through a JV (BreadTalk is the major shareholder of the JV) with Fairy Rise Development (Din Tai Fung franchise owner), Din Tai Fung Taiwan, a UK partner and a Taiwanese individual. We also see scope for more outlets in Thailand as there are currently only three Din Tai Fung restaurants. As restaurant margins are attractive, better sales mix from restaurant business would improve overall profitability.
200
278342
448
534
686
836
914957 951
0
100
200
300
400
500
600
700
800
900
1,000
07 08 09 10 11 12 13 14 15 16
Store count
Bakery Restaurants Food Courts Total
ASIAN INSIGHTS VICKERS SECURITIES Page 9
Company Guide
BreadTalk Group Ltd
Industry landscape Singapore Leading player in Singapore. According to Euromonitor, BreadTalk is the largest player as a Food/Drink/Tobacco specialist in Singapore. BreadTalk has 6% market share, leading Prima Deli and Bengawan Solo in the bakery space. Leading Food/Drink/Tobacco Specialist in Singapore
Source: Euromonitor, DBS Bank CAGR of 3.5% over the next five years. The Food/Drink/Tobacco specialist space in Singapore is estimated to be worth S$887m in 2016 by Euromonitor and it is expected to grow at a CAGR of 3.5% from 2016 to 2021 driven by increase in selling space and sales per square feet. The decline in sales from 2014 was affected by decline in number of outlets, selling space and sales per square feet, in line with the weak GDP subject to a one-year lag. Food/Drink/Tobacco space forecast to reach S$1.05b by
2021F
Source: Euromonitor, DBS Bank
China 1,344 bakery companies operating in a RMB262bn market in China. According to Euromonitor, the Food/Drink/Tobacco specialist retailers market reached RMB262b in 2016, with Bakery specialists accounting for the largest share of sales within food/drink/tobacco specialists. There were 1,344 bakery companies competing in China as of June 2015 according to Bread and Cake Professional Committee of China National Food Industry Association. Bakery players include local players like Holiland, Ruby, and foreign players such as 85C, Bakery Christine, and UBC Coffee from Taiwan, BreadTalk from Singapore, Paris Baguette, Tous Les Jours and Caffé Bene from Korea, Vie de France from Japan. CAGR of 1.7% in the next five years. Euromonitor expects the Food/Drink/Tobacco specialists space to grow by 1.7% CAGR in the next five years and sees rising acceptance of the Western diet and the growing preference for diverse foods, bread and cakes becoming popular for breakfast and snacks, especially among the younger generation. According to another report by Daxue Consulting, a market research and management consulting firm focusing on the Chinese market, it notes that there is scope for the market to grow as the average annual consumption of bakery products per capita in China is low at 5.83kg compared with close to 22kg in Japan. Food/Drink/Tobacco space to grow by 1.7% CAGR till
2021F
Source: Euromonitor, DBS Bank
Breadtalk6% Prima Deli
5%
Bengawan Solo4%
Others85%
800
850
900
950
1,000
1,050
1,100
2012 2013 2014 2015 2016F2017F2018F2019F2020F2021F
S$m
0
50
100
150
200
250
300RMBb
ASIAN INSIGHTS VICKERS SECURITIES Page 10
Company Guide
BreadTalk Group Ltd
Management composition Professionally managed, led by founder. BreadTalk continues to be led by its founder Mr George Quek who is the Chairman of the Group, and is responsible for driving its strategic direction and future development. His wife Katherine Lee is Deputy Chairman, and is responsible for concept creation, product development and enhancement of various brands both locally and globally. BreadTalk has a professional management team of executives comprising of former bankers and executives in F&B managing its day to day operations. Key executives of BreadTalk are compensated above S$250,000 annually.
Focus to improve earnings quality. BreadTalk’s strategy in its earlier years had been to grow its presence regionally. In particular, store count increased by 572 between 2010 and 2014. It adopted the franchise model, and licensed franchisees regionally to grow its store network. While revenue grew, margins and earnings had suffered in FY15 due to cost management issues. Loss making and poorer performing outlets were consolidated in FY16, improving net profit margins as revenue declined. Management is now focused on improving the quality of earnings in the near term before growing its regional footprint aggressively again.
Key Management Team
Name and appointment Profile
Mr. Oh Eng Lock
Group CEO
Mr Oh oversees the Group’s global operations, focusing on strategic planning, investments, business
development and regional expansion. He was Regional MD at Merrill Lynch in Hong Kong, overseeing
the North Asia businesses and has held senior executive and management posts at DBS Bank and
UOB, growing their franchises in China, Taiwan and the USA. Mr Oh holds a Bachelor of Arts degree
from the University of Singapore.
Mr. Chan Ying Jian
Group CFO
Mr Chan is responsible for the Finance, Legal and Risks functions of BreadTalk. He was formerly Vice
President of Equity Research at J.P. Morgan Securities Singapore, as ASEAN Sector Head for Agri-
Commodities and Consumer Staples. Mr Chan holds a double-degree in Business Management
(majoring in Finance) and Accountancy from the SMU (summa cum laude – with Highest Distinction).
He is also a Chartered Accountant of Singapore (CA Singapore) & Chartered Financial Analyst (CFA).
Mr. Janson Ong China Lock
CEO Food Atrium Division
Mr Ong is responsible for the overall development, operations, projects execution and strategic
planning of the business globally. He has over 20 years of F&B experience, pioneering Singapore’s first
food court business and initiating over 100 food court concepts 350 F&B outlets in ASEAN and
Greater China. He joined the BreadTalk in 2003 as Director of Food Republic in China and was also
MD for Food Republic in Hong Kong.
Mr. Tan Aik Peng
CEO Bakery Division
Mr Tan joined BreadTalk as MD of the Bakery Division in 2014. He was previously Head of Corporate
Strategy, Planning and Business Development at SATS Ltd. He has an MBA from Nanyang Business
School and also holds a Bachelor of Mechanical Engineering (Hons, 2nd Upper) and a Master of
Engineering in Quality and Statistics from NUS.
Mr. Cheng William
CEO Restaurant Division
Mr Cheng leads BreadTalk’s business and marketing strategies, structure and people development at
all Din Tai Fung and Ramen Play’s businesses in Singapore and Thailand. He has over 20 years of
experience in culinary and operations and was previously Branch Manager at BreadTalk before the
inception of Din Tai Fung in 2003.
Mr Frankie Quek Swee Heng
CEO ASEAN Region
Mr Quek is responsible for the formulation and implementation of the expansion plans for the Group
in the ASEAN Region. He started out as the Group’s Assistant GM in 2001 before assuming various
roles including GM, Head of Bakery ops in Shanghai and Beijing, Group COO and CEO for China
Region. Mr Quek holds an honorary Master of Business Administration degree from the American
University of Hawaii, USA. He is the brother of Chairman George Quek.
Source: Company, DBS Bank
ASIAN INSIGHTS VICKERS SECURITIES Page 11
Company Guide
BreadTalk Group Ltd
Key Risks
Negative publicity affects consumer confidence and the marketability of its franchise. Food safety is an important aspect of the foodservice sector. It not only affects the health of customers consuming BreadTalk’s food products, but it also influences the marketability of the franchise when attracting new and capable franchisees. BreadTalk has had some negative publicity in especially in 2015. A China TV programme claimed that its Shenzhen outlet has not changed its doughnut frying oil for years. There were also other issues apart from food safety. In Singapore, it launched buns commemorating Mr Lee Kwan Yew after his death, which drew negative responses over social media. BreadTalk was however quick to stop the sale of those buns. BreadTalk also apologised to the public after a photograph showing a staff member filling up “freshly prepared” soya milk for sale using commercially brand soya bean milk, made its rounds on the internet. Incidences such as these can generate negative responses from the public which can potentially affect sales as well as the marketability of its franchise overseas.
Food safety and licences. As a foodservice operator, it is important to maintain food safety. Lapses would lead to reputational risks and in extreme cases, food operation licences could be revoked. Other risks include food contamination and tampering risks, outbreak of diseases or viruses in livestock inducing food scares, exposure to negative publicity, customer complaints and potential litigation. May be affected by disease outbreaks and poor weather. Business could slow during a health crisis or poor weather such as haze. During Singapore’s haze in October 2015, businesses were disrupted as consumers hid indoors. The Singapore government estimated that the haze had resulted in economic losses of about S$700m.
ASIAN INSIGHTS VICKERS SECURITIES Page 12
Company Guide
BreadTalk Group Ltd
Financials Profit and Loss Profit growth driven by better cost management. Revenue has largely been driven by store count. However, EBIT margins have fallen due to higher operating expenses as a result of store expansion. Over the last two years, there has been more focus on cost management to achieve better store operating efficiencies. In FY16, gross margins and operating cost management had improved through better control of food wastage, as well as better staff cost management. Both gross margins and EBIT margins improved by 2ppts and 0.1ppt respectively. More effective cost management strategies should continue to improve margins that will ultimately drive earnings growth. We expect net profit to reach S$23.0m by FY18F. More focused on cost and margins in recent years
Source: Company, DBS Bank Revenue driven by operational efficiencies. Even though outlet growth is expected to be muted, revenue growth will be led by more efficient store operating matrices such as sales per square foot and sales per outlet. We expect sales per outlet to grow from S$0.65m to S$0.69m per year over the next two years. We expect revenue to reach S$673m by FY18F. Revenue assumptions
S$m FY15 FY16 FY17F FY18F
Total outlets 957 951 962 969
Sales/outlet/yr (S$m) 0.65 0.65 0.67 0.69
Source: Company, DBS Bank Expect margins to improve. We see margins improving over the next few years from 1) increased mix of franchise outlets as opposed to owned bakery stores; 2) turnaround in Foodcourt operations; and 3) higher mix of restaurant business. Franchise stores have much higher margins compared to owned bakery stores due to the absence of operating expenses. Change in store mix would see margin improvements. Meanwhile, Foodcourt business turned
around in 4Q16 with a small profit, and absence of segments write-offs of S$5-6m would improve segment earnings. A sustained improvement in earnings from Foodcourt would lift margins going forward. We see higher mix from restaurant sales over the next two years, and the higher margin nature of the restaurant business would lift overall margins. Expect operating margins to increase to 6.6% by FY18F led by these initiatives. Balance sheet and cashflow Cash business, balance sheet currently in net debt. As with all foodservice companies, BreadTalk is a cash business. The business generated S$65-90m of operating cashflows annually and S$28-54m of positive free cashflows in the last three years. Net debt as of end-Dec16 is about S$60.7m, equivalent to approximately S$0.22 per share, or net debt ratio 0.3x. BreadTalk was in net cash till FY12 when it built its BreadTalk IHQ. In FY13 when it opened it IHQ, net debt was S$89m. It further issued S$75m of bonds in FY16 due 1 April 2019 at 4.6% coupon for general corporate purposes, including refinancing of existing borrowings, and financing capital expenditure and general working capital. Strong cash position
S$m FY15 FY16 FY17F FY18F
Operating cashflow 66.5 89.2 87.6 84.4
Collection days 33.5 35.4 34.5 34.6
Payable days 143.3 144.1 140.1 140.9
Net cash/(debt) (99.6) (43.5) (3.0) 34.4
Net cash/share (Scts) (35.4) (15.5) (1.1) 12.2
Source: Company, DBS Bank Generates positive working capital cashflows. Outlets provide foodservice for cash while operational scale allows it procure supplies on credit. Inventory days are minimal due to the short shelf life and freshness of food inputs. Therefore, the business generates positive working capital cashflows. Even though business is on a cash basis, collection days are a result of payment lag by franchisees. Higher capex requirement for Foodcourts due to larger floor area. Capex per store ranges from S$200,000 to S$300,000 for bakery, approximately S$1m for restaurant, S$2-3m for Foodcourts. Capex
S$m Capex Avg Sqft Capex-
psf
Avg lease
Bakery S$2-300k 600-800 385 3 years
Foodcourt S$3m 20,000 150 5-6 years
Restaurants S$1m 3,000-4,000 285 4-5 years
Source: Company, DBS Bank
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
0
200
400
600
800
1000
1200
08 09 10 11 12 13 14 15 16
margin %Store countStore count (LHS) EBIT Margins (RHS)
ASIAN INSIGHTS VICKERS SECURITIES Page 13
Company Guide
BreadTalk Group Ltd
Improving ROAE ROAE to recover, driven by better margins. ROAE was as high as 20% in FY14, but has fallen because of lower net profit. However, we expect ROAE to head higher over the next two years on the back of earnings and margin recovery.
Strong ROAE
S$m FY15 FY16 FY17F FY18F
Revenue 624 615 643 673
Net profit 7.60 11.4 26.3 23.0
Net margin (%) 1.2 1.9 4.1 3.4
Total assets 545 534 555 584
Equity 129 132 151 167
ROAE (%) 6.0 8.8 18.6 14.5
Source: Company, DBS Bank
ASIAN INSIGHTS VICKERS SECURITIES Page 14
Company Guide
BreadTalk Group Ltd
Valuation and recommendation Project earnings CAGR of 63%, led by more new franchise stores, turnaround of food court business. We see earnings CAGR growth driven by more franchise stores and a turnaround of the loss making food atrium business. Franchise stores generate high margins as there is minimal cost, and revenue recognised from these stores flows directly to operating profit. We see lower losses from food atrium business as it heads for a turnaround in profitability within two years. Initiatives such as fine tuning tenant mix to fill up vacant stalls are currently being implemented to ensure that the food atrium business turns around. Finally, higher mix of Din Tai Fung restaurants will improve overall margins. Core earnings trades at average PE valuations
Source: DBS Bank AXA’s valuation within market range of S$1,700-
2,100/NLA
Office buildings NLA Valuation Rate/NLA
CPF building 324,000 S$550m 1,698
Twenty Anson 207,000 S$432m 2,086
Capital Tower 738,000 S$1,325m 1,795
Mapletree Anson 332,000 S$690m 2,078
AXA Tower 675,000 S$1,247m 1,847
Source: Company, DBS Bank
Reinstate coverage with BUY, SOTP-based TP of S$1.69. The stock currently trades at 22.5x FY17F PE, which implies that BreadTalk’s core business is valued at 18x PE (after stripping out the value of its investments), a discount to regional restaurants, QSRs, bakery and foodservice peer average of 23x. Our valuation of BreadTalk comprises of core F&B business which we value at S$1.33 based on 22x FY17F core PE, investments at S$0.43 based on book and market value, and net debt worth S$0.07 per share. We derive a TP of S$1.69, representing 25% upside from the last closing price. Reinstate coverage with a BUY recommendation. Core business valued at 18x forward PE at current
share price
Component S$m Per share S$
BreadTalk’s share price 381 1.36
Value of investments -121.8 -0.43
111 Somerset -12.5 -0.04
Net debt / (cash) FY16 60.7 0.22
Core share price ex investments 307.6 1.09
Core earnings S$m 17.0 0.06
Core PE ex investments 18.1 18.1
Source: Company, DBS Bank SOTP valuation
SOTP breakdown S$ Basis
Core business based on PE 373.5 22x FY17F earnings
Shanghai Luidi China Inv’t ppty 23.0 Based on book
Beijing Tongzhou Investment 34.65 Based on cost
Equity stake in CHIJMES 22.685 Based on book
Value of AXA stake less debt 23 Market valuation
CHIJMES Bonds 18 Based on book
Net (debt)/cash FY17F -20.2 Inc. Somerset disposal
Equity Value 475.1
No of shares 281
TP 1.69
Source: Company, DBS Bank
-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
Jan-
11
Apr
-11
Jul-
11O
ct-1
1Ja
n-1
2A
pr-1
2Ju
l-12
Oct
-12
Jan-
13
Apr
-13
Jul-
13O
ct-1
3Ja
n-1
4A
pr-1
4Ju
l-14
Oct
-14
Jan-
15
Apr
-15
Jul-
15O
ct-1
5Ja
n-1
6A
pr-1
6Ju
l-16
Oct
-16
Jan-
17
Apr
-17
(x)
+1 sd
+2 sd
-1 sd
-2 sd
Avg
ASIAN INSIGHTS VICKERS SECURITIES Page 15
Company Guide
BreadTalk Group Ltd
Valuation of comparable office buildings
Contract Date Property Name Location Tenure
Attributed Net Lettable Area (sq ft)
Price ($) Rate per NLA Buyer
Jan-15 AXA Tower Tanjong Pagar
66.5 remaining (2015)
675,000 1,170,000,000 1,733 PREH
Jun-15 One Raffles Place
Raffles Place 99/FH 600,000 1,429,166,667 2,382 OUECT
Jun-15 PWC Building (30% stake)
8 Cross Street 99 LH 106,712 150,000,000 1,892 DBS Bank
Dec-15 ICS Building 137 Cecil Street
Freehold 67,550 210,000,000 3,109 Mr Zhou
Dec-15 Suntec Tower Two -12, 13 and 29 Floor
Suntec 99 LH 38,352 101,560,000 2,648 Suntec REIT
Nov-15 CPF Building 79 Robinson Road
99 LH (2067)
324,000 550,000,000 1,698 Ascendas Land
Apr-16 78 Shenton Way (50% stake)
78 Shenton Way
99 LH 181,100 301,500,000 1,665 Alpha Investment Partners
May-16 Remaining 60% interest in CapitaGreen
Raffles Place 57 remaining expiring 31Mar2073
703,122 1,600,500,000 2,276 (2,700 assuming 99 year leasehold)
CCT
May-16 Straits Trading Building
9 Battery Road
999 LH 158,897 560,000,000 3,524 Mr Tahir - Found of Mayapada Group
Jun-16 Asia Square Tower 1
Marina Bay 99 LH from 2007
1,200,000 sqft office & 40,000 sqft retail
3,400,000,000 2,668 Qatar Investment Authority
Sep-16 110 Robinson Road
110 Robinson Road
FH 14,233 45,100,000 3,169 Mr Tahir - Found of Mayapada Group
Jan-17 GSH Plaza Raffles Place Remaining 72 years
- 725,200,000 2,900 Fullshare Holdings
Feb-17 PWC Building (100% stake)
8 Cross Street 78.5 years 355,704 747,000,000 2,100 Manulife
Source: Various press reports, DBS Bank Core earnings trade below regional peer average of 23x
Source: Thomson Reuters, DBS Bank
Company
Market Cap
(US$m) Px Last PE (A ct ) PE (Yr 1) PE(Yr 2)P/BV (x )
P/Sales (x )
ROE (%)
Operat ing Margin
(%)
Net Margin
(%)
Div idend Y ield (%)
NetGearing
(x )
BreadTalk Group Ltd 273 1.36 44.1x 22.5x 16.5x 2.5x 0.6x 19% 6.5% 4.1% 1.8% 0.02
Local & regional foodserv ice/bakery /restaurant play ers
Jollibee Foods Corp 4,227 197.00 33.6x 28.4x 24.4x 5.4x 1.6x 20% 6.9% 5.8% 1.3% cash
SPC Samlip Co Ltd 1,700 220,500 37.2x 30.5x 29.0x 6.3x 1.0x 17% 3.5% 2.6% 0.4% 0.52
MK Restaurant Group PCL 1,654 63.00 27.3x 24.9x 24.2x 4.3x 3.8x 16% 14.7% 13.9% 3.4% cash
Gourmet Master Co Ltd 1,403 287.00 24.4x 20.7x 19.7x 5.0x 1.9x 20% 10.5% 7.9% 0.8% cash
Berjaya Corporation Bhd 423 0.37 NULL NaN NaN 0.2x 0.2x -3% 6.7% -1.8% na cash
JUMBO Group Ltd 326 0.71 25.3x 22.6x 20.1x 6.1x 3.1x 29% 15.6% 13.8% 2.4% cash
Oldtown Bhd 282 2.76 22.7x 19.2x 17.9x 3.2x 3.0x 17% 20.3% 15.4% 2.2% cash
ABR Holdings Ltd 104 0.72 26.8x NaN NaN 1.5x 1.4x 5% 6.5% 5.2% 3.5% cashOld Chang Kee Ltd 74 0.86 20.9x 20.2x 19.3x 3.3x 1.4x 14% 8.3% 6.7% 3.5% cash
Christine International Holdings Ltd 66 0.48 NULL NaN NaN 0.6x 0.4x NaN na na na NaN
Neo Group Ltd 61 0.58 55.6x 29.0x 14.5x 2.9x 0.6x 20% 4.9% 4.8% 1.7% 1.97
Japan Foods Holding Ltd 54 0.44 16.6x NaN NaN 2.4x 1.2x 12% 6.5% 6.0% 4.6% cashSoup Restaurant Group Ltd 37 0.18 48.9x NaN NaN 5.6x 1.4x 11% 1.0% 2.6% 1.9% cash
Katrina Group Ltd 37 0.23 10.7x 9.5x 8.1x 3.1x 0.8x 35% 9.5% 7.9% 6.3% cashSakae Holdings Ltd 35 0.34 NULL NaN NaN 1.4x 0.6x -41% -10.7% -15.4% na 1.24
Tung Lok Restaurants (2000) Ltd 27 0.14 38.2x NaN NaN 2.4x 0.4x 4% 0.3% 0.7% na cash
Pavillon Holdings Ltd 15 0.05 23.5x NaN NaN 0.5x 1.3x 2% 2.3% 5.7% na cash
Regional av erage 29.4x 22.8x 19.7x 3.2x 1.4x 11% 6.7% 5.1% 2.7% 1.2x
ASIAN INSIGHTS VICKERS SECURITIES Page 16
Company Guide
BreadTalk Group Ltd
Key Assumptions
FY Dec 2013A 2014A 2015A 2016A 2017F 2018F Bakery outlets 1,223 1,373 862 862 867 872
Restaurant outlets 41.0 34.0 30.0 32.0 34.0 36.0
Food court outlets 58.0 63.0 65.0 57.0 61.0 61.0
Total 1,322 1,470 957 951 962 969 Annual sales per outlet S$m
0.64 0.65 0.65 0.65 0.67 0.69 Segmental Breakdown
FY Dec 2013A 2014A 2015A 2016A 2017F 2018F
Revenues (S$m)
Bakery operations 271 294 308 306 314 322
Restaurant sales 122 131 143 150 163 176
Food court income 143 165 173 159 167 175
Others 0.0 0.0 0.0 0.0 0.0 0.0
Total 537 590 624 615 643 673
Operating profit (S$m)
Bakery operations 11.1 7.23 5.15 12.6 14.1 14.5
Restaurant sales 9.02 12.7 25.8 23.2 25.2 27.3
Food court income 4.87 5.53 (2.9) (7.5) 2.50 2.63
Others (2.1) (0.6) (0.1) 6.99 0.0 0.0
Total 22.9 24.9 28.0 35.3 41.9 44.4
Operating profit (S$m) Margins (%)
Bakery operations 4.1 2.5 1.7 4.1 4.5 4.5
Restaurant sales 7.4 9.7 18.0 15.4 15.5 15.5
Food court income 3.4 3.4 (1.7) (4.7) 1.5 1.5
Others N/A N/A N/A N/A N/A N/A
Total 4.3 4.2 4.5 5.7 6.5 6.6 Source: Company, DBS Bank
Includes S$9m investment income
Food court business to turnaround
Margins to expand through better cost management/efficiencies
Higher staff costs and coming off a more robust SG50 year
ASIAN INSIGHTS VICKERS SECURITIES Page 17
Company Guide
BreadTalk Group Ltd
Income Statement (S$m)
FY Dec 2013A 2014A 2015A 2016A 2017F 2018F Revenue 537 590 624 615 643 673
Cost of Goods Sold (252) (279) (294) (278) (283) (296)
Gross Profit 285 311 330 337 360 377
Other Opng (Exp)/Inc (262) (286) (298) (305) (318) (332)
Operating Profit 22.9 24.9 32.6 32.5 41.9 44.4
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 0.83 9.50 (1.3) (0.8) 0.87 0.92
Net Interest (Exp)/Inc (1.4) (1.7) (1.3) (4.8) (4.8) (3.9)
Exceptional Gain/(Loss) 0.0 0.0 (4.6) 2.80 9.30 0.0
Pre-tax Profit 22.4 32.8 25.4 29.7 47.2 41.4
Tax (6.3) (6.8) (10.8) (12.1) (10.9) (9.5)
Minority Interest (2.5) (3.9) (7.0) (6.2) (10.1) (8.8)
Preference Dividend 0.0 0.0 0.0 0.0 0.0 0.0
Net Profit 13.6 22.2 7.60 11.4 26.3 23.0
Net Profit before Except. 13.6 22.2 12.2 8.63 17.0 23.0
EBITDA 63.1 80.4 80.9 80.0 93.1 97.8
Growth
Revenue Gth (%) 19.9 9.9 5.9 (1.5) 4.6 4.6
EBITDA Gth (%) 26.0 27.4 0.6 (1.1) 16.4 5.0
Opg Profit Gth (%) 23.1 8.7 30.8 (0.2) 28.7 6.0 Net Profit Gth (Pre-ex) (%)
13.3 63.0 (45.0) (29.2) 96.6 35.7
Margins & Ratio
Gross Margins (%) 53.0 52.7 52.9 54.9 56.0 56.0
Opg Profit Margin (%) 4.3 4.2 5.2 5.3 6.5 6.6
Net Profit Margin (%) 2.5 3.8 1.2 1.9 4.1 3.4
ROAE (%) 15.4 20.2 6.0 8.8 18.6 14.5
ROA (%) 3.3 4.4 1.4 2.1 4.8 4.0
ROCE (%) 6.9 6.2 5.2 5.4 9.1 9.1
Div Payout Ratio (%) 37.2 19.1 55.6 94.7 26.8 30.5
Net Interest Cover (x) 16.9 14.9 24.7 6.8 8.7 11.3 Source: Company, DBS Bank
Margins Trend
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
2014A 2015A 2016A 2017F 2018F
Operating Margin % Net Income Margin %
Includes divestment gain of 112 Katong and impairment of Foodcourt business in China.
Includes divestment gain of 111 Somerset.
No fixed dividend policy
Includes special dividend of 1.35 Scts
CHIJMES, Carl’s Jr China and Jumbo. Expect less drag from Carl’s Jr.
Includes S$3.2m write off for store closures
Rationalisation of stores
ASIAN INSIGHTS VICKERS SECURITIES Page 18
Company Guide
BreadTalk Group Ltd
Quarterly / Interim Income Statement (S$m)
FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 4Q2016 Revenue 162 155 155 150 157 153
Cost of Goods Sold (74.5) (72.3) (73.5) (67.4) (68.8) (67.8)
Gross Profit 87.2 82.8 81.1 82.4 88.5 85.5
Other Oper. (Exp)/Inc (79.6) (68.5) (73.9) (75.7) (79.6) (75.8)
Operating Profit 7.60 14.4 (1.0) 10.3 13.2 9.71
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc (0.6) (0.7) (0.3) 0.0 0.56 (1.0)
Net Interest (Exp)/Inc (1.3) 0.79 (1.1) (1.5) (1.2) (0.9)
Exceptional Gain/(Loss) 0.0 (4.6) 8.19 (3.5) (4.3) 2.40
Pre-tax Profit 5.71 9.88 5.70 5.15 8.32 10.1
Tax (2.3) (5.6) (2.3) (2.2) (3.0) (4.7)
Minority Interest (1.8) (3.1) (1.0) (1.7) (2.1) (1.4)
Net Profit 1.57 1.15 2.45 1.31 3.26 4.02
Net profit bef Except. 1.57 5.74 (5.8) 4.85 7.50 1.63
EBITDA 18.8 25.9 11.4 21.9 25.9 20.4
Growth
Revenue Gth (%) 4.4 (4.1) (0.3) (3.1) 5.1 (2.6)
EBITDA Gth (%) 4.2 37.8 (55.8) 91.6 18.0 (21.2)
Opg Profit Gth (%) 46.1 89.0 (107.2) (1,086.7) 28.4 (26.3) Net Profit Gth (Pre-ex) (%)
(45.7) 266.0 (200.2) (184.3) 54.8 (78.3)
Margins
Gross Margins (%) 53.9 53.4 52.5 55.0 56.3 55.8
Opg Profit Margins (%) 4.7 9.3 (0.7) 6.9 8.4 6.3
Net Profit Margins (%) 1.0 0.7 1.6 0.9 2.1 2.6
Revenue Trend
Source: Company, DBS Bank
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
142
144
146
148
150
152
154
156
158
160
162
164
3Q
20
14
4Q
20
14
1Q
20
15
2Q
20
15
3Q
20
15
4Q
20
15
1Q
20
16
2Q
20
16
3Q
20
16
4Q
20
16
Revenue Revenue Growth % (QoQ)
Includes gain from sale of 112 Katong
Includes write off of Foodcourt business totalling S$5-6m from 1Q16 to 3Q16
ASIAN INSIGHTS VICKERS SECURITIES Page 19
Company Guide
BreadTalk Group Ltd
Balance Sheet (S$m)
FY Dec 2013A 2014A 2015A 2016A 2017F 2018F Net Fixed Assets 226 221 206 181 171 159
Invts in Associates & JVs 8.21 34.0 33.9 35.3 36.1 37.1
Other LT Assets 85.8 115 126 105 105 104
Cash & ST Invts 79.4 95.5 102 138 164 202
Inventory 10.0 10.6 9.88 9.81 9.99 10.5
Debtors 49.2 54.5 60.0 59.2 62.4 65.3
Other Current Assets 9.81 8.19 7.28 6.46 6.46 6.46
Total Assets 468 539 545 534 555 584
ST Debt
30.3 76.3 82.0 31.5 31.5 31.5
Creditor 103 97.7 94.1 86.8 91.9 96.2
Other Current Liab 80.3 89.1 86.2 99.8 99.8 99.8
LT Debt 138 121 120 150 136 136
Other LT Liabilities 12.9 15.7 16.8 14.5 14.5 14.5
Shareholder’s Equity 94.0 125 129 132 151 167
Minority Interests 10.0 13.2 17.2 19.9 30.0 38.8
Total Cap. & Liab. 468 539 545 534 555 584
Non-Cash Wkg. Capital (114) (113) (103) (111) (113) (114)
Net Cash/(Debt) (89.1) (102) (99.6) (43.5) (3.0) 34.4
Debtors Turn (avg days) 31.6 32.1 33.5 35.4 34.5 34.6
Creditors Turn (avg days) 166.1 156.8 143.3 144.1 140.1 140.9
Inventory Turn (avg days) 16.7 16.2 15.3 15.7 15.5 15.3
Asset Turnover (x) 1.3 1.2 1.2 1.1 1.2 1.2
Current Ratio (x) 0.7 0.6 0.7 1.0 1.1 1.2
Quick Ratio (x) 0.6 0.6 0.6 0.9 1.0 1.2
Net Debt/Equity (X) 0.9 0.7 0.7 0.3 0.0 CASH
Net Debt/Equity ex MI (X) 0.9 0.8 0.8 0.3 0.0 CASH
Capex to Debt (%) 63.0 21.7 18.6 20.2 23.9 23.9 Source: Company, DBS Bank
Asset Breakdown
S$75m bond issuance 4.9% coupon due 1 April 2019
Gearing resulted from financing for building IHQ
Mainly from payment lag by franchisees. Otherwise a cash based business
ASIAN INSIGHTS VICKERS SECURITIES Page 20
Company Guide
BreadTalk Group Ltd
Cash Flow Statement (S$m)
FY Dec 2013A 2014A 2015A 2016A 2017F 2018F Pre-Tax Profit 22.4 32.8 25.4 29.7 47.2 41.4
Dep. & Amort. 39.3 45.9 49.6 48.3 50.4 52.5
Tax Paid (7.6) (6.9) (6.9) (9.1) (10.9) (9.5)
Assoc. & JV Inc/(loss) (0.8) (9.5) 1.31 0.83 (0.9) (0.9)
Chg in Wkg.Cap. 16.9 6.00 0.42 10.2 1.71 0.95
Other Operating CF 2.28 5.02 (3.4) 9.20 0.0 0.0
Net Operating CF 72.5 73.3 66.5 89.2 87.6 84.4
Capital Exp.(net) (106) (42.9) (37.5) (36.7) (40.0) (40.0)
Other Invts.(net) (14.7) (22.1) (20.4) 16.3 0.0 0.0
Invts in Assoc. & JV (2.9) (5.0) (22.9) (2.8) 0.0 0.0
Div from Assoc & JV 0.0 0.75 1.19 0.46 0.0 0.0
Other Investing CF 1.34 (16.6) 21.7 (2.3) 0.0 0.0
Net Investing CF (122) (85.9) (57.9) (25.0) (40.0) (40.0)
Div Paid (3.7) (5.1) (4.2) (8.0) (7.0) (7.0)
Chg in Gross Debt 72.5 28.6 3.60 (20.6) (14.0) 0.0
Capital Issues 0.0 (0.6) (0.7) 0.0 0.0 0.0
Other Financing CF (3.7) (4.4) (8.7) (9.6) 0.0 0.0
Net Financing CF 65.1 18.5 (10.0) (38.2) (21.0) (7.0)
Currency Adjustments 0.0 (1.0) 0.82 (0.4) 0.0 0.0
Chg in Cash 15.2 4.94 (0.6) 25.7 26.5 37.4
Opg CFPS (S cts) 19.8 23.9 23.5 28.1 30.5 29.7
Free CFPS (S cts) (12.0) 10.8 10.3 18.7 16.9 15.8 Source: Company, DBS Bank
Capital Expenditure
33.0
34.0
35.0
36.0
37.0
38.0
39.0
40.0
41.0
42.0
43.0
44.0
2014A 2015A 2016A 2017F 2018F
Capital Expenditure (-)
S$m
Capex to be similar to FY16
Repaid S$14m debt for 111 Somerset investment
ASIAN INSIGHTS VICKERS SECURITIES Page 21
Company Guide
BreadTalk Group Ltd
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 4 Apr 2017 08:27:48 (SGT) Dissemination Date: 4 Apr 2017 08:55:07 (SGT)
GENERAL DISCLOSURE/DISCLAIMER
This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated
corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii)
redistributed without the prior written consent of DBS Bank Ltd.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS
Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively,
the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other
factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or
warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without
notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific
investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees
only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial
advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit)
arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not
to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons
associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have
positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and
other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can
be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments.
The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may
not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to
update the information in this report.
This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned
schedule or frequency for updating research publication relating to any issuer.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and
assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on
which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual
results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED
UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:
(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and
(b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk
assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.
Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies)
mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the
commodity referred to in this report.
ASIAN INSIGHTS VICKERS SECURITIES Page 22
Company Guide
BreadTalk Group Ltd
DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public
offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage
in market-making.
ANALYST CERTIFICATION
The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the
companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her
compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s)
primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the
issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real
estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the
management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or
his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has
procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of
research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment
banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment
banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the
DBS Group.
COMPANY-SPECIFIC / REGULATORY DISCLOSURES
1. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates do not have a proprietary
position in the securities recommended in this report as of 28 Feb 2017.
2. Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research
Report.
Compensation for investment banking services:
3. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a
manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further
information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document
should contact DBSVUSA exclusively.
Disclosure of previous investment recommendation produced:
4. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other
investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12
months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by
DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.
1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of
which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.
2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
ASIAN INSIGHTS VICKERS SECURITIES Page 23
Company Guide
BreadTalk Group Ltd
RESTRICTIONS ON DISTRIBUTION
General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.
Australia This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), both of which are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.
Hong Kong This report has been prepared by a person(s) who is not licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities in Hong Kong pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong). This report is being distributed in Hong Kong and is attributable to DBS Vickers Hong Kong Limited, a licensed corporation licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong).
For any query regarding the materials herein, please contact Paul Yong (CE. No. ASE988) at [email protected].
Indonesia This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia.
Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.
Wong Ming Tek, Executive Director, ADBSR
Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No.
198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.
Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only intended for institutional clients only and no other person may act upon it.
ASIAN INSIGHTS VICKERS SECURITIES Page 24
Company Guide
BreadTalk Group Ltd
United Kingdom
This report is produced by DBS Bank Ltd which is regulated by the Monetary Authority of Singapore. This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd, ("DBSVUK"). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom. In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication.
Dubai
This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.
United States This report was prepared by DBS Bank Ltd. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.
Other jurisdictions
In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.
DBS Bank Ltd
12 Marina Boulevard, Marina Bay Financial Centre Tower 3 Singapore 018982 Tel. 65-6878 8888
e-mail: [email protected] Company Regn. No. 196800306E