• Keeping a cautious approach to expansion
• Smaller loss for Food Atrium
• Restaurants performance largely stable

Cost management initiatives bearing fruit

BreadTalk Group’s 3Q16 results came in within our expectations. Revenue was down 2.7% YoY to S$157.3m while PATMI rose 107.7% to S$3.3m. 9M16 revenue was down 1.6% to S$461.7m, forming 73% of our full year expectations, while PATMI was up 8.5% to S$7.0m, constituting 68% of FY16F estimates. Notably, overall gross profit margin was better at 56% for 3Q16 (vs. 54% in 3Q15), mainly attributable to initiatives focused on improving operations particularly for the Bakery segment.

Strong growth in profits for Bakery

Bakery segment’s 3Q16 revenue was flattish at S$78.6m. We understand that same stores sales growth for key concepts BreadTalk and Toast Box have been positive in Singapore for 9M16, but weaker franchise revenue has been dragging revenue growth. EBITDA rose by 142% to S$10.6m, and margin was up 7.9ppt to 13.5%. We believe the good growth seen in Bakery should sustain on the back of backend initiatives being implemented. In addition, the group has been reviewing its strategy for their Franchise portfolio.

Food Atrium segment on recovery path

Food Atrium segment’s 3Q16 revenue was down 11% to S$40.6m, while EBITDA dropped 38% to S$3.1m as it has been consolidating outlets, especially in China. With the net loss for the segment narrowing QoQ, and an eventual turnaround for Taiwan and Thailand, the segment could see better results in FY17. As a few new outlets are expected to open next year in Tier 1 cities for China, there would still likely be gestation costs incurred.

Share price at reasonable levels

Restaurant segment results were generally flattish during the quarter, partly due to the high base in 3Q15, which included the period of Singapore’s SG50 celebrations. Looking ahead, we believe the three segments still have room for improvement. As the stock’s share price has declined ~9% to levels around our fair value, we are upgrading the stock from sell to HOLD. Rolling forward to a blended 23x FY16/17 P/E, our fair value estimate is also raised to S$1.07 (previously: S$0.99).

Source: OCBC Research - 4 Nov 2016