• FY13 growth driven by outlet expansion
• Margins stabilising but gearing higher
• Expect further growth but overvalued

FY13 growth driven by outlet expansion

BreadTalk’s FY13 revenue met our expectations as it increased 19.9% to S$536.5m, forming 99.6% of our forecast. PATMI came in slightly below our expectations, up 13.3% at S$13.6m, making up 96.3% of our forecast. Segmental sales growth is led by Food Atrium at 29.2%, followed by Restaurants at 19.1% and finally Bakery at 16.4%. In line with its aggressive expansion plans, total outlets increased by 21.9% to 836. A final cash dividend of 1.3 Scents is proposed, bringing the full year dividend to 1.8 S-cents, or 1.9% yield based on yesterday’s closing price.

Margins stabilising but gearing higher

Between FY09 to FY12, BreadTalk’s performance was characterised by doubledigit growth but declining margins, which raised concerns about the expansion’s sustainability. This trend is bucked in FY13 with operating and net profit margins stabilising at 4.3% and 3.0% respectively. Nevertheless, net gearing continues to increase from 39.0% in FY12 to 94.8% in FY13. We think that other than higher risks, this raises questions about how the management is planning to achieve its stated goal of S$1b sales by 2016 and 2000 outlets by 2018. In order to reach the S$1b sales target, a CAGR of 23.1% is required between FY14 to FY16, which we think has to be driven by new stores more than organic growth of recently opened stores. In turn, we expect net gearing to increase substantially and we have doubts on whether the riskreward is justifiable, noting that key risks ahead include China slowdown and political unrest in the region.

Expect further growth but overvalued

We think that expansion will become more challenging as BreadTalk gets larger. Hence, we are assuming a 15% growth in FY14 instead, which is still healthy by any measure. Given the growth prospects, we value BreadTalk with 16.6x PER, which is 1 s.d. above its five year historical average. However, we obtain a fair value estimate of S$0.85 (previous S$0.77) and maintain SELL as the stock seems overvalued now.

Source: OCBC Research - 27 Feb 2014