• Upgrade to NEUTRAL with higher Target Price of SGD0.81 from SGD0.75, 7% downside plus 2.3% FY19F yield.
• BreadTalk Group’s FY18 results beat our estimate, with core food & beverage (F&B) PATMI at SGD12.7m (+1% y-o-y).

4Q18 Results Were Above Expectations

• BREADTALK GROUP LIMITED (SGX:CTN)’s 4Q18 results were above expectations, due to a write-back of the bonus provision in previous quarters for the bakery segment, lower-than-expected corporate costs and margin improvements in the food atrium segment.

Segmental Performance

• The bakery segment continued to underperform, with losses incurred in China. This was mitigated by stronger earnings in Singapore and other franchise income.
• Meanwhile, the food atrium segment surprised us with wider margins, despite the already-low vacancy rates. According to BreadTalk Group, the active management of its stallholders in the food atriums over the last two years resulted in higher revenue for the stalls – as such, higher variable rental payments were collected.
• The restaurant segment’s numbers are in line. Note that the strong performance at existing restaurants was offset by one-off opening costs of SGD1-1.5m for Din Tai Fung in the UK.

Baking in Progress

• Group CEO, Mr Henry Chu is now leading efforts to turn around the bakery business. While there is potential for earnings to improve, this may take a couple more quarters to realise.
• In addition, BreadTalk Group announced yesterday that it acquired the remaining 50% stake in BreadTalk Thailand from Minor International (MINT TB). We understand that the bakery business in Thailand is in the red, and this may take time to turn around.
• BreadTalk Group also aims to open another Din Tai Fung outlet in the UK in 3Q19, which should help to improve economies of scale in the UK over the medium term.

We Raise Our Forecasts by 12-14% for FY19-21

• We raise our forecasts by 12-14% for FY19-21 on stronger food atrium margins and lower interest costs.
• In view of the change in accounting rules from FY19 onwards, which would distort EBITDA, we now value BreadTalk Group’s core F&B businesses using DCF, instead of a target EV/EBITDA. This together with our now-higher earnings forecasts, lift our SOP-derived Target Price to SGD0.82 from SGD0.75.

Source: RHB Invest Research - 21 Feb 2019