• S$80m deal will consolidate BreadTalk’s position as the third largest foodcourt player in Singapore with 26 outlets.
• Deal translates into 6.5x historical book vs Koufu at < 4x P/BV.
• Food Junction incurred S$1.7m loss in FY18 with 1H19 earnings of only S$3,183.
• Neutral on the deal, as market share and operational scale are outweighed by interest cost.

What’s New

BreadTalk to buy Food Junction to become third largest foodcourt player in Singapore.

• BREADTALK GROUP LIMITED (SGX:CTN) announced this morning that it is buying 100% of Food Junction Management Pte Ltd (Food Junction) for S$80m. Key sellers are Auric Pacific Group (SGX:A23) and Lippo which own close to all of Food Junction at 98.1%.
• Food Junction owns 12 foodcourts in Singapore and three in Malaysia with one more opening next year in Mid Valley Southkey, Johor Bahru.
• BreadTalk has 14 foodcourts in Singapore and two in Malaysia. This will consolidate BreadTalk’s position as the third largest foodcourt operator in Singapore, behind NTUC Foodfare/Kopitiam (10+52) and Koufu (47).

No PE valuation due to losses, headline P/B valuation on the high side.

• PE valuation is not meaningful given that Food Junction incurred a loss in FY18 and 1H19’s earnings was small. NTA is at S$12.3m implying price-to-book of 6.5x, relative to Koufu’s < 4x P/BV. BreadTalk will draw down an additional debt of S$50m to finance this deal.

Strengthening market share/operational network and cost synergies.

• With NTUC Foodfare buying Kopitiam (2018), Broadway buying S-11 (2018), and now BreadTalk buying Food Junction, the market for chained foodcourts and coffeeshops is indeed consolidating. Larger F&B firms continue to seek market share and expansion in this space by taking out smaller players.
• Although earnings are not accretive, this acquisition allows BreadTalk to strengthen its market share and store network in the foodcourt segment to better compete with the top 2 players. There could be some EPS drag in the short term, but once it is able to get the loss-making foodcourts into profitability, contribution to the group will be positive.
• Note that a foodcourt is a high fixed-cost business. Once revenue exceeds those fixed costs, there is high-margin potential.

Koufu at BUY, BreadTalk at HOLD.

• We continue to like Koufu (SGX:VL6) which is a BUY (see report: Koufu Group Ltd - Foodcourts Driving Growth), while BreadTalk is currently a HOLD.
• We believe interest costs for more loans is likely to weigh on BreadTalk’s earnings going forward.

Source: DBS Research - 2 Sep 2019