• Heartened by restaurant division
• But gestation costs, consolidation remain drags
• Prefer a steadier state first

Some impairment incurred

BreadTalk Group had a challenging FY15. Driven by growth in sales for all segments (Bakery, Food Atrium, Restaurant), revenue was up 5.9% at S$624.1m. However, PATMI declined 66% to S$7.6m, due to higher staff and rental costs, as well as underperformance of stores. ~S$1.0m of goodwill impairment arose from the Beijing Food Atrium business and S$4.4m of asset impairment and write-off were due to certain underperforming outlets and closure of outlets.

Food Atrium will still be hit by start-up costs

Food Atrium’s full year revenue rose 5.0% to S$173m. This division opened five outlets (two in Singapore, three in China) but closed three outlets in China (two prematurely, one upon lease expiry) this year. While the group looks to take a less aggressive approach towards expansion, we understand that at least three outlets have been committed to open in Shanghai this year, thus we believe a substantial turnaround from an operating loss of S$2.9m (FY14: S$5.5m) may not be likely yet as depreciation and start-up costs will continue to hit. On similar factors, Bakery’s revenue was up 4.7% to S$308m but operating profit also declined 29% to S$5.1m.

Restaurant division key support for bottomline

Restaurant division’s revenue was up 9.5% to S$143m on the back of decent SSSG from Din Tai Fung restaurants. Following a complete exit of its Ramen Play business in China, this should effectively eradicate persistent losses, as reflected by a 103% growth in operating profit to S$25.8m, and improvement in margins by ~8ppt to 18.0%.

Still cautious for now

After years of focus on revenue growth, management is turning efforts to rebranding, cost rationalization and productivity initiatives. While we are heartened by Restaurant’s contribution, we are still seeing usual drags on other segments from gestation costs, depreciation as well as potentially more consolidation. Thus we prefer to wait for a steadier state first. Based on unchanged 23x FY16F core EPS (excluding gain from 112 Katong), our fair value estimate slips to S$0.96 (previous: S$1.02). Maintain SELL. A final DPS of 1.0 S-cent was declared, bringing total DPS to 1.5 S-cents, similar to last year.

Source: OCBC Research - 26 Feb 2016