• Maintain NEUTRAL with new SGD1.04 Target Price from SGD0.93, with 5% downside, as we roll over our valuation to FY19F.
• Our conversation with management has us expecting earnings growth to accelerate in FY19F- 20F, as BreadTalk’s new F&B concepts mature. Still, given YTD uptick in BreadTalk share price, we think investors have priced in the strong execution of new store concepts and future earnings delivery.
• Potential catalyst includes stronger-than-expected earnings growth.
• Key risks are longer-than-expected gestation periods and poor traction of new concepts in new geographies.

Song Fa – Surpassing Expectations

Based on our conversation with BreadTalk CFO, Mr Chan Ying Jian, last Monday, we understand that the Song Fa outlets in China have a payback period of less than one year. We raise our FY18F earnings by 2.5% on better-than-expected performance of Song Fa.

Positive on the Long-term Prospects

Aside from Song Fa, BreadTalk has on-boarded/established several new food & beverage (F&B) concepts including Wu Pao Chun, Sergeant Kitchen, Nayuki and Tai Gai. These concepts are expected to have much smaller capex ( < SGD0.5m/store) and higher margins compared to BreadTalk’s existing bakery, Din Tai Fung and food atrium businesses.  New concepts would be incubated in the fourth division, which Mr Chan expects to contribute 20% to topline in 3-5 years.

Also, with the partnership with Shinmei Corp, we expect SGD80,000-100,000 pa. We expect margin expansion to come from cost-saving initiatives, as Shinmei helps to consolidate and procure more raw materials and packaging needs.

Prized for Perfection

Currently, trading at 25x FY19F P/E (ex investment properties value), we think the market has priced in the accelerated growth from the new F&B concepts. As we see it, BreadTalk will have to outperform market expectations for further re-rating.

Maintain NEUTRAL with SOP-based SGD1.04 Target Price. Key risks are longer-than-expected gestation period and inability to generate consumer interests to the new concepts in new geographies.

Source: RHB Invest Research - 19 Jul 2018