A prized jewel to be swept up. Primacy Investment, a wholly-owned subsidiary of Minor International (MINT) in Thailand, surfaced as a shareholder in January and purchased an additional 2.58% last week at an average of SGD0.83 a share, reaffirming our suspicions that Minor may just be getting started. As one of the largest hospitality and leisure companies in Asia, MINT has a track record of acquiring established restaurant brands, namely Coffee Club and Thai Express in Singapore. With BreadTalk’s premium reputation as a bread operator, and entrenched position in Asia, this could be the prized jewel which Minor has been waiting for.

Who is Minor International (MINT)? MINT is a hospitality business headquartered in Thailand. It operates over 1,300 restaurants and 80 hotels and resorts in Asia, the Middle East and Africa, and also has 200 retail outlets for lifestyle brands. In recent years, MINT has been steadily building up its restaurant brand portfolio, and recently acquired Riverside & Courtyard restaurant in China in Dec 2012 and Thai Express in Dec 2011.

Highly desirable brands all packaged into one. In our view, BreadTalk offers MINT an excellent portal to extend its cross-selling channels, as well as an opportunity to strengthen and add prominent brands to its growing overseas portfolio. BreadTalk is a leading bakery chain in Singapore, which has restaurants and cafes also figuring prominently in its portfolio. In China, it has acquired a reputation as a premium bakery operator and is poised to take advantage of the country’s rising affluence. BreadTalk’s established ties with local businessmen through franchising and JV agreements have also helped spur its growth in China and facilitate access to domestic resources.

What Minor could offer to BreadTalk in return. We believe if BreadTalk wants to achieve greater success in China, it may have to join hands with large F&B conglomerates. The support of strong parent companies offers leverage and better expansion opportunities for bakery chains. For example, Saint Honore Holdings was privatised by Convenience Retail Asia (CRA), one of Li & Fung’s subsidiaries, for 15.6x 2006 PER. Maxim Caterers Hong Kong, an equally strong competitor, is 50% owned by Dairy Farm International.

Deserving of more premium valuations. Current valuations of BreadTalk are below peers with a forward consensus P/E of 15.6x against 16.5x. Granted BreadTalk’s valuation is not too far off its peers. One reason may be MINT believed that BreadTalk’s profits are understated by its expansion costs and the stock will look cheap once the expansion phase slows. We believe BreadTalk deserves a more premium valuation for its multi-country success in growing its bakery chain.

Source: Maybank Kim Eng Research - 27 Mar 2013