• Bakery tackling underperformers
• New concept to take over RamenPlay
• Food Atrium sustaining recovery

Slightly Mixed Performance in the Quarter

Amid a challenging retail environment, BreadTalk Group’s 2Q17 revenue was down 1.5% YoY to S$147.6m due to a slightly mixed performance across the three F&B segments, while PATMI was up 62% to S$2.1m, translating to a net profit margin of ~1.4%. 1H17 revenue was 3% lower at S$295.2m while PATMI came up to a total of S$12.8m vs. S$3.8m in 1H16. Recall that 1Q17 saw a net capital gain of S$9.3m while 1Q16 had a gain of S$8.8m from divestments in its property investments. Overall core F&B net profit continued to improve and was up 35.1% to S$4.0m for the quarter, mainly driven by a better Food Atrium segment.

Cleaning Up Bakery Franchise Portfolio

The bakery division has eliminated a few underperformers under their Bakery franchise portfolio. Although earnings were partially impacted, management hopes this initiative will result in a higher quality franchise income in the long term. While this is on-going, efforts are also being made to address underperformers under stores that they own directly. Stores in Shanghai and Beijing were weaker as competition remains strong. In addition, we understand blended raw materials cost were ~13% higher YoY. As such, 2Q segment revenue and EBITDA was lower by 3.3% and 12.7% respectively.

Recovery at Food Atrium; New Concept for Restaurant Division

Revenue was down 3.3% for Food Atrium due to closure of underperforming stores, but EBITDA recovered 326% to S$5.9m, led by a good performance across the entire portfolio. For the Restaurants division, revenue was up 3.7% with EBITDA largely unchanged as Din Tai Fung was flattish. The group also plans to convert the remaining RamenPlay outlets to So Ramen by end Sep-17 as management believes the new concept is able to bring in better revenue and profitability.

Ceasing Coverage

A higher interim dividend of 1.0 S-cents/share has been announced vs. last year’s 0.5 Scents/share. Separately, the group’s property investments include AXA Tower, Chijmes and Beijing Tongzhou Integrated Development, which can help to unlock value as well. However, due to a redistribution of internal resources, we are ceasing coverage.

Source: OCBC Research - 4 Aug 2017