• S$8.5m gain from sale of 112 Katong
• Deeper losses from Food Atrium
• Significant increase in overall staff costs

Core profitability still weak

BreadTalk Group’s 1Q16 core results continued to be dragged by high expenses. The group posted a 1.4% YoY increase in revenue to S$154.6m, meeting 24% of our full year forecast. PATMI rose 22% to S$2.4m and formed 21% of our full year estimate, but stripping out the gain of S$8.5m from the divestment of 112 Katong, a non-core real estate investment, the bottomline would have conceivably been a loss. This was mainly attributable to a significant increase in overall personnel expenses, which was up 23.1% to S$52.4m.

Food Atrium segment sees deeper losses

Food Atrium segment’s 1Q16 revenue was marginally down 0.4% to S$41.8m, while EBITDA declined 82% to S$0.9m. Segment profit was down from a loss of S$37k in 1Q15 to S$4.3m. Keeping in mind that the group had 2 fewer outlets compared to 1Q15, the group also cited impact from weaker traffic in certain shopping malls in Mainland China. In addition, start-up costs from new outlets, write-offs from outlet closures, and higher operating expenses added pressure to profitability.

Better performance from other segments

Bakery segment’s revenue was down 1.3% to S$75.9m due to some decline in same store sales for BreadTalk outlets in Singapore, Hong Kong and Beijing, as well as a slowdown for franchise outlets in China. Nonetheless, EBITDA margin improved from 7.9% in 1Q15 to 8.9% due to better cost control and productivity gains. The Restaurant segment continued to be driven by strong SSSG, with revenue up 9.9% to S$36.9m, and EBITDA margin rose from 16.9% in 1Q15 to 17.7%.

Keeping our view unchanged

The overall number of outlets has also declined from 957 in 4Q15 to 948 this quarter, mainly due to 4 net closures for Bakery and 5 net closures for Food Atrium. We could expect more consolidation amid the group’s efforts towards cost management and productivity initiatives. Given the group’s core business performance above, we still prefer to wait for an overall steadier state. Thus we are keeping our SELL rating and fair value estimate of S$0.96 unchanged. Separately, an interim special dividend of 1.35 S-cents/share or S$3.8m has been announced, representing ~45% of the divestment gain from 112 Katong.

Source: OCBC Research - 10 May 2016