• BREADTALK (SGX:CTN) announced the proposed acquisition of Food Junction for SGD80m.
• Food Junction currently has 12 food courts in Singapore and three in Malaysia, with an additional one expected to open in 2020 at The Mall in Mid Valley Southkey.
• In FY18, Food Junction incurred a net profit loss of SGD0.2m and in 1H19 it recorded a net profit of only SGD3,183. As of 30 June 2019, Food Junction had a net asset value of SGD12m.

Acquisition to be funded through internal resources and debt facilities.

• BreadTalk is likely to finance the acquisition with a loan of SGD49.6m and SGD30.4m in cash. This would raise the group’s net gearing to 0.9x by the end of the year from 0.3x in FY18.

The Rationale for Acquisition

• The acquisition would allow the group to widen BreadTalk's market share in the food court space, allowing it to reap additional income stream and benefit from potential synergies from sharing of resources.

Valuation Seems Too Expensive

• Valuation seems too expensive at a P/B of 6.7x especially when compared to peers like Koufu (SGX:VL6) and Kimly (SGX:1D0), which are trading at 3.7x and 2.8x FY19F P/B respectively. Due to the insignificant earnings, the P/E multiple looks high at the moment. However, it is unclear if this is due to one-off expenses or poor operations.
• Based on our observations, Food Junction opened one food court at Century Square last year and two new food courts this year, one at Great World City and another at Jewel Changi Airport. It plans to open one new food court in Malaysia in 2020. The new openings could potentially contribute to higher start-up costs before sales ramp up. According to Auric Pacific (SGX:A23)’s last reported results in 4Q16, Food Junction’s pretax profit was positive.

Consolidation of Food Courts and Coffee-shops Players

• This acquisition came after the coffee-shop Broadway acquired 23 S11 coffee-shops for an estimated cost of SGD2 and NTUC Enterprise acquired 80 Kopitiam amount last year.
• We believe the consolidation of the food courts and coffee-shops players brought an increased bargaining power when it comes to negotiation of rental rates from landlords.

Maintain NEUTRAL With An Unchanged Target Price of SGD0.71

• Based on the headline numbers, we think the acquisition is too expensive and earnings dilutive. We will provide more details after the teleconference briefing with management tomorrow.

Source: RHB Invest Research - 2 Sep 2019