• Maintain NEUTRAL with lower Target Price of SGD0.67 from SGD0.71, 3% upside and 2% yield.
• On 2 Sept, BreadTalk (SGX:CTN) announced the proposed acquisition of Food Junction for SGD80m.
• During the briefing yesterday, management clarified that Food Junction’s weak 1H19 earnings were due to several factors that would no longer prevail once the acquisition is completed. Management cited that on a normalised EBITDA basis, the acquisition price translates to 7.64x EV/EBITDA, which seems reasonable when compared to peers’.

Rationale for Acquisition

• Currently, Food Junction has 12 food courts in Singapore and three in Malaysia. Management considers the location of Food Junction food courts would complement well the existing portfolio of BreadTalk. In addition, Food Junction has a different value proposition from BreadTalk’s Food Republic.
• Unlike Food Republic, which targets the premium segment, Food Junction has more of a mass-market branding. The average ticket size at Food Junction is 10-15% lower than at Food Republic. As such, management believes the acquisition would allow the group to cater to a different market segment and expand into non-traditional shopping malls.

Causes for the Weak 1H19 Results for Food Junction

• Causes for the weak 1H19 results for Food Junction that would not prevail after the acquisition. According to BreadTalk’s management, Food Junction’s soft earnings were largely attributed to high costs for its headquarter which amounted to SGD3m. Since BreadTalk would not be taking over Food Junction’s head office, it believes there would be cost-savings of SGD2m.
• Food Junction shut down several unprofitable direct-operated stalls before the acquisition announcement and the impairment costs of these stalls closures also contributed to weaker 1H19 results.
• Lastly, Food Junction opened in April 2019 a premium food court in Jewel Changi Airport, called Five Spice. Food Junction thus incurred start-up costs with only two months of revenue contribution in 1H19.

Minimal Upside in the Near-term

• This acquisition is expected to be completed in 23 months. We estimate the group to incur SGD1.8m of additional interest expense pa to fund this acquisition, an amount which is acquisition.
• Post 2H20, we think profitability could factor in the professional costs in FY19F as well as higher interest expense and Food Junction after 2020. All these items lowered our Target Price to SGD0.67 from SGD0.71.

Source: RHB Invest Research - 4 Sep 2019