• Weaker earnings due to Food Atrium
• Bakery and Restaurant continue to grow
• DPS of 0.5 S-cents declared

Dragged by similar factors

BreadTalk Group’s 2Q16 revenue was down 3.3% YoY to S$149.8m while PATMI declined 55% to S$1.3m. 1H16 revenue was slightly down by 1% to S$304.3m, meeting 48% of our full year expectations, while PATMI dropped 23% to S$3.8m, forming 32% of FY16F estimates. If we strip out write-offs and divestment gains, 1H16 core PATMI would have been a net loss of S$1.2m vs. a profit S$6.7m in 1H15. The weaker bottomline has been largely attributable to the Food Atrium business.

Cleaning up Food Atrium segment

Food Atrium segment’s 1H revenue was down 5% to S$80.2m, while EBITDA dropped 77% to S$2.3m. Segment’s loss before tax widened from S$0.6m in 1H15 to S$7.6m in 1H16. Similar factors played a role in the decline here, such as the slowdown in Mainland China operations, write-offs for outlet closures, gestation costs for new outlets and higher operating expenses. For 2H16, we expect just a few more closures, while two new outlets are committed to open in Shanghai.

Steady growth in profits for Bakery and Restaurant

Bakery segment’s 1H revenue was slightly down 2% to S$150.7m, due to weaker franchise revenue from China. On a QoQ basis, there was a net closure of 16 outlets that were mostly in China. Segment profit before tax was S$4.3m vs. S$2.6m in 1H15. Looking at the Restaurant segment, 1H revenue rose 6% to S$73.5m, and segment profit before tax was higher at S$10.6m vs. S$7.7m in 1H15.

Looking for core profitability to pick up

With steady earnings growth from Bakery and Restaurant segments, while the group keeps its focus on cost management, all eyes are on the Food Atrium segment for an eventual turnaround. At this juncture, we prefer to stay cautious until we see pressure ease on Food Atrium and signs of a consistent pick-up in overall core profitability. Rolling forward to 23x FY16/17F P/E, our fair value estimate is raised from S$0.96 to S$0.99. Maintain SELL. Separately, an interim dividend of 0.5 S-cents/share was declared, similar to last year.  

Source: OCBC Research - 5 Aug 2016