• Maintain NEUTRAL call and SGD0.81 Target Price, 2% downside plus 2.5% dividend yield.
• BREADTALK GROUP LIMITED (SGX:CTN)’s 1Q19 PATMI grew 11.5% y-o-y to SGD1.3m. While this met only 9% of our full-year estimate, 1Q has been the weakest quarter seasonally and we deemed the results as in line with our expectation.

Food Atrium Continued Its Stellar Performance

• Food Atrium continued its stellar performance, being able to maintain low vacancy rates for three quarters now. Although revenue for the Food Atrium division only grew SGD1.1m (+3.1% y-o-y), the bulk of the increment flowed directly down to pretax profit, given that the costs were pretty much fixed. As such, pretax margin grew 2.2ppts and pretax profit grew SGD0.9m, a whopping 43.8% y-o-y to SGD3.0m.
• We believe Food Atrium would continue to be the pillar of support for the group’s earnings this year.

But More Time Needed for Bakery Division to Pick Up

• Bakery division pretax profit was down 51.9% y-o-y. We believe this was largely attributable to the consolidation of the 50% stake in BTM (BreadTalk Thailand), which the group acquired from Minor Food Group last quarter.
• According to management, BTM was loss-making. We believe management would take a couple more quarters to revive BTM’s profitability. On top of that, the group continued to trim its number of franchisee outlets, which also reduced its revenue and profitability.

Restaurant Division Goes Back to Gestation Phase Due to New Openings

• Restaurant pretax profit was also down a miserable 50.8% y-o-y. We believe this was largely due to BreadTalk’s foray into the UK. BreadTalk opened its first Din Tai Fung in London in Dec 2018 and is expected to open another this year.
• BreadTalk would also continue to focus on new outlets in Singapore and Thailand. While we think Singapore’s and Thailand’s outlets would break even fairly quickly, we think it may need a few more Din Tai Fung UK stores to cover costs of a new head office there.
• 4orth division losses should also expand in the upcoming quarters given that management is expecting to open more outlets of Song Fa this year.

Valuation Is Fair

• We like management’s tried and true ability to turn businesses around. However, given that three out of four of its divisions are in the ramping-up phase, we think the current valuation is fair.
• Upside catalysts include sale of AXA tower, faster-than-expected turnaround of incubating concepts in 4orth division and improvement in bakery’s margins.
• Downside risks include a longer gestation period and slowdown in China.
• Refer to attached PDF report for 1Q19 results summary table and details on target price derivation.

Source: RHB Invest Research - 9 May 2019